SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] Annual Report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the fiscal year ended December 31,
1997
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
to
Commission File Number 0-24760
ORPHAN MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1784594
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 RIDGEDALE DRIVE, SUITE 475,
MINNETONKA, MN 55305 (612) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of common stock held by non-affiliates of Registrant,
based upon the last sale price of the Common Stock reported on the Nasdaq
National Market tier of The Nasdaq Stock Market on March 24, 1998 was
$40,803,777. Common stock outstanding at March 24, 1998: 6,115,962 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's Annual Meeting of Shareholders to be held on May
27, 1998 are incorporated by reference in Part III, Items 10, 11, 12 and 13 of
this Form 10-K.
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PART I.
This Annual Report contains statements that are not descriptions of historical
facts. The words or phrases "will likely result", "look for", "may result",
"will continue", "is anticipated", "expect", "project", or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may be
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those currently anticipated due to a number
of factors, including those identified in the "Cautionary Statements" filed with
the Securities and Exchange Commission as an Exhibit to the Company's Annual
Report on Form 10-K.
Antizol(TM), Antizol-Vet(R), Caprogel(TM), Busulfex(TM), Repliderm(TM),
Intrachol(TM), Colomed(TM), Cystadane(R), Elliotts B(R) Solution, Sucraid(TM),
Xyrem(TM), "The" Orphan Drug Company(TM), Orphan Medical, Inc.(R) and Dedicated
to Patients with Uncommon Diseases(R) are trademarks of the Company.
Provigil(R) is a registered trademark of Cephalon, Inc.
ITEM 1. BUSINESS
GENERAL
Orphan Medical, Inc. is a development stage company that acquires, develops and
markets products of high medical value intended to address inadequately treated
or uncommon diseases within selected strategic therapeutic market segments
("STMS"). A drug has high medical value if it offers a major improvement in the
safety or efficacy of patient treatment and has no substantially equivalent
substitute. In late 1997, the Company focused its efforts on drugs with high
medical value that fit within three selected STMS: Antidotes, Oncology Support,
and Sleep Disorders. Within the three STMS, the Company is currently marketing
two products, is actively developing two potential products, and is pursuing new
product acquisitions to add to these STMS. In addition, prior to defining the
STMS strategy in late 1997, the Company had two marketed products (Cystadane and
Antizol-Vet) and one potential product (Sucraid) that do not fit within the
three selected STMS; however, the Company expects to continue offering these low
volume products because they have high medical value and require limited
resources to market and distribute to patients.
The Company received clearance from the Food and Drug Administration ("FDA") to
market Antizol in 1997 and Elliotts B Solution, Cystadane, and Antizol-Vet in
1996. Elliotts B Solution and Cystadane were first sold commercially in late
1996, followed by Antizol-Vet in early 1997 and Antizol in late 1997. In
addition, a new drug application ("NDA") was submitted in May 1997 for Sucraid,
an enzyme replacement therapy for use in the treatment of a genetic disease
known as congenital sucrase-isomaltase deficiency ("CSID"). In November 1997,
the FDA notified the Company that the NDA for Sucraid is approvable, pending
final product labeling and acceptable responses to FDA chemistry inquiries.
While Cystadane and Sucraid do not fall within the Company's three selected
STMS, they require limited marketing support because the estimated market size
for these products is small and the products are or will be distributed directly
to patients. In addition, the Company is reviewing its distribution options for
another product not included in any of the three selected STMS, Antizol-Vet,
which may include the sale or licensing of its rights. The Company expects to
submit NDAs for two STMS products, Busulfex and Xyrem, by late 1998 and mid
1999, respectively.
The Company believes its strategies reduce the time, costs and risks
traditionally involved in bringing pharmaceutical products to market. The
Company does not conduct basic research and does not attempt to discover new
drugs. Instead, the Company acquires licenses for development projects that
already have some clinical data that indicate therapeutic value and safety. In
addition, the Company may consider acquiring products that have already received
marketing clearance from the FDA. The Company uses contract development,
manufacturing, distribution and consulting companies to assist it in its product
development activities. This approach avoids the costs and financial risks
associated with developing these capabilities internally.
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The Company's focus on the distinct markets of its STMS is intended to allow it
to concentrate its marketing and development efforts on a limited number of
medical specialists or patients, making a large specialized sales force
unnecessary to market the Company's products. The high medical value of the
Company's products is expected to facilitate marketing efforts directed toward
users and prescribers. In late 1997, the Company added a small, specialized
sales force in order to commercialize Antizol. The Company believes the physical
distribution of its products can be efficiently handled by other companies, such
as Cardinal Health, a distributor of pharmaceutical products.
To date, the activities of the Company have consisted primarily of obtaining the
rights for pharmaceutical products, hiring the personnel required to implement
the Company's business plan, managing the development of these products and
preparing for the commercial introduction of its products. The Company reported
its first revenues in December 1996. The Company does not expect to achieve
profitable operations until at least 1999.
THE REGULATORY PROCESS
Pharmaceutical products intended for therapeutic use in humans are governed by
extensive FDA regulations in the United States and by comparable regulations in
foreign countries. The process of seeking and obtaining FDA approval for a
previously unapproved new human pharmaceutical product generally requires a
number of years and involves the expenditure of substantial resources.
Following drug discovery, the process required before a drug product may be
marketed in the United States includes (i) pre-clinical laboratory and animal
safety tests, (ii) the submission to the FDA of an investigational new drug
("IND") application, (iii) clinical and other studies to assess safety and
parameters of use, (iv) adequate and well-controlled clinical trials to
establish the safety and effectiveness of the drug product, (v) the submission
to the FDA of an NDA, (vi) FDA approval of the NDA prior to any commercial sale
or shipment of the product and (vii) finally, marketing of the drug.
Typically, pre-clinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the product's pharmacology and
toxicology and to identify any potential safety problems that would preclude
testing in humans. The results of these studies, together with the general
investigative plan, protocols for specific human studies and other information,
are submitted to the FDA as part of the IND application. The FDA regulations do
not, by their terms, require FDA approval of an IND. Rather, if the FDA does not
notify the sponsor to the contrary within 30 days of receipt of the IND, they
allow a clinical investigation to commence. As a practical matter, however, FDA
approval is often sought before a company commences clinical investigations.
That approval may come within 30 days of IND receipt, but may involve
substantial delays if the FDA requests additional information.
The initial phase of clinical testing (Phase I) is conducted to evaluate the
metabolism and pharmacological actions of the experimental product in humans, as
well as the side effects associated with increasing doses, and, if possible, to
gain early evidence of possible effectiveness. Phase I studies can also evaluate
various dosages, methods and schedules of product administration. These studies
generally involve a small number of healthy volunteer subjects, but may be
conducted in people with the disease that the product is intended to treat. The
total number of subjects is generally in the range of 20 to 80. A demonstration
of therapeutic benefit is not required in order to complete Phase I trials
successfully. If acceptable product safety is demonstrated, Phase II trials may
be initiated.
Phase II trials are designed to evaluate the effectiveness of the product in the
treatment of a given disease and involve patients with the disease under study.
These trials often are well-controlled, closely monitored studies involving a
relatively small number of subjects, usually no more than several hundred. The
optimal dosages, methods and schedules of administration are determined in these
studies. If Phase II trials are successfully completed, Phase III trials are
often commenced, although Phase III trials are not always required, particularly
for drugs of high medical value intended for smaller patient populations.
Phase III trials are expanded, controlled trials that are performed after
preliminary evidence of the effectiveness of the experimental product has been
obtained. These trials are intended to gather the additional information about
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safety and effectiveness needed to evaluate the overall risk/benefit
relationship of the experimental product. In addition, these trials provide the
substantial evidence of both effectiveness and safety necessary for product
approval. Phase III trials usually involve from several hundred to several
thousand subjects.
A clinical trial may combine the elements of more than one phase (i.e., a Phase
I/II or II/III trial) and typically two or more Phase III studies are required
for FDA approval. A company's designation of a clinical trial as being of a
particular Phase is not necessarily indicative that such a trial will be
sufficient to satisfy the FDA requirements of that Phase because this
determination cannot be made until the protocol and data have been submitted to
and reviewed by the FDA. In addition, a clinical trial may contain elements of
more than one Phase notwithstanding the designation of the trial as being of a
particular Phase. The FDA closely monitors the progress of the Phases of
clinical testing and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based on the data accumulated and its assessment of the
risk/benefit ratio to patients. It is not possible to predict with certainty the
time required to complete Phase I, II and III studies with respect to a given
product.
Upon the successful completion of clinical testing, a marketing application
(e.g., NDA) is submitted to the FDA for approval. This application requires
detailed data on the results of pre-clinical testing, clinical testing and the
composition of the product; specimen labeling to be used with the drug;
information on manufacturing methods; and samples of the product. Following the
passage of the Prescription Drug User Fee Act ("PDUFA"), the FDA typically takes
from six to eighteen months to review an NDA after it has been accepted for
filing. Following its review of a marketing application, the FDA invariably
raises questions or requests additional information. The NDA approval process
can, accordingly, be very lengthy. Further, there is no assurance that the FDA
will ultimately approve an NDA. If the FDA approves the NDA, the new product may
be marketed for the applications or treatments that have been approved by the
FDA. The claims with which a product can be marketed are also subject to review
and approval by the Division of Drug Marketing, Advertising and Communications
("DDMAC"), the FDA's marketing surveillance department within the Center for
Drugs. The FDA often clears a product for marketing with a modification to the
proposed label claims or requires that post-marketing surveillance, or Phase IV
testing, be conducted.
PHARMACEUTICAL INDUSTRY OVERVIEW
In the 1950s and early 1960s, drug development was relatively inexpensive and
regulatory approval was straightforward. Pharmaceutical companies marketed their
products directly to physicians who made prescription and purchase decisions. In
the 1970s, however, regulatory standards and competition increased and the price
of research and development and manufacturing rose dramatically. In the 1980s
and 1990s, drug companies revised their targeted rates-of-return or financial
"hurdle rates", as well as other selection criteria, to avoid developing drugs
whose incremental profit contributions were considered insufficient to provide
acceptable returns on investment. Many of the drugs that did not meet these
criteria were drugs for smaller patient populations. As a consequence, new drugs
for smaller patient populations were less likely to be developed by larger
companies. Some research institutions, universities and small companies,
however, have continued to develop and initiate clinical studies on such drugs.
ORPHAN DRUG ACT
To encourage the continued development of drugs for smaller patient populations,
the federal government enacted the Orphan Drug Act of 1983. This Act provides
incentives to companies to develop and market drugs for rare diseases or
conditions that are believed to affect fewer than 200,000 people in the United
States. A company must request orphan drug designation before submitting an NDA,
and after the FDA grants orphan drug designation, the generic identity of the
therapeutic agent (drug) and its potential orphan use (market) are publicized by
the FDA. Orphan drug designation does not convey any advantage in, or shorten
the duration of, the regulatory approval process. The FDA may grant orphan drug
designation to more than one company of an identical drug for the same
designated indication. Under current law, orphan drug status is granted to the
first company receiving FDA marketing approval of a drug with orphan drug
designation. A company receiving orphan drug status for a designated indication
is entitled to a seven-year exclusive marketing period in the United States for
the drug with the approved indication, subject to certain limitations. However,
orphan drug status does not prevent subsequent
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approval of a different drug for the same designated indication, nor subsequent
approval of the same drug for a different designated indication, nor provide any
marketing exclusivity in foreign markets.
Since 1983, the FDA has assigned orphan drug designation to more than 650
potential products. Although the Company believes the size of the aggregated
markets for orphan and small market drugs may be large, the total annual market
for any particular orphan drug rarely exceeds $50 million and most have
potential markets of less than $10 million annually.
STRATEGIC BACKGROUND
The Company's strategy is based on several factors relating to changes in the
health care and pharmaceutical industries:
* Larger pharmaceutical companies generally have increased their
financial hurdle rates, seek new products with annual revenues greater
than $100 million and avoid developing new products that address
diseases outside their therapeutic area of focus. As a result, many
developmental products of high medical value are available for
licensing on favorable terms. If these products are intended to address
smaller markets, they may be eligible for orphan drug designation. Many
of these products have already been developed to the point where the
time and cost required to bring the product to market can be reasonably
estimated.
* Because of corporate "downsizings," many pharmaceutical companies have
released skilled employees experienced in the research, development,
manufacturing or commercialization of new medicines. These individuals
have often formed or joined contract clinical research organizations
("CROs"), contract manufacturing companies or drug development and
marketing consulting firms. Thus, the knowledge and skills required to
address many aspects of drug development are available on a contract
basis from outside companies or individuals.
* To address rapidly changing market forces, alternative means of
marketing and distributing pharmaceuticals have been created. Many
products, particularly those targeted to smaller, well-defined markets,
do not require a large, specialized sales force and can be marketed
through direct means such as telemarketing, direct mailings, continuing
medical education programs and exhibits at professional meetings. In
addition, these products can be effectively distributed through
companies proficient in distribution of pharmaceutical products to
smaller patient populations.
In response to these changes, the Company has adopted a business strategy that
is centered on products of high medical value within selected strategic
therapeutic market segments, uses the knowledge and skills available on a
contract basis from outside sources, and uses alternative marketing and
distribution channels.
STRATEGY
The Company focuses on products of high medical value intended to address
inadequately treated or uncommon diseases within a selected STMS. A drug has
high medical value if it offers a major improvement in the safety or efficacy of
patient treatment and has no substantially equivalent substitute. In addition to
those with high medical value, the Company seeks products that will likely be
eligible for insurance reimbursement; have readily measured clinical endpoints,
existing positive clinical data, and proprietary attributes; and offer
attractive financial returns. The Company does not conduct basic research and
does not attempt to discover new drugs, but instead seeks to acquire and further
develop products that already have some clinical data that indicate the presence
of therapeutic value and safety. The Company's strategy of developing and
marketing high medical value drugs with these additional characteristics is
intended to achieve the following benefits.
* REGULATORY REQUIREMENTS AND REVIEW -- Drugs of high medical value have
greater likelihood of receiving expedited review by the FDA. If such
drugs also have smaller patient populations, the number of patients
required for clinical trials is generally reduced.
* REDUCTION OF PRODUCT DEVELOPMENT TIME AND COST -- The amount of data
required to bring a new drug of high medical value to market is
generally less than for a drug that is available in similar dosage
forms or formulations and that is intended for very large markets.
Furthermore, the Company generally attempts to
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concentrate resources and project management attention on a single
medical indication in order to limit the amount of clinical information
required by the FDA to clear a product for marketing. The time and cost
of development is directly related to the amount of clinical
information required for regulatory approval.
* LIMITED INFRASTRUCTURE -- The Company believes that high quality
pharmaceutical products can be efficiently and economically developed
using well established independent contractors. Accordingly, the
Company intends to utilize the available pool of contract development,
manufacturing, distribution and consulting companies to assist in
product development and marketing activities. This approach allows the
Company to avoid the costs, time and financial risks associated with
developing these capabilities internally.
* MARKETING STRATEGY - The Company focuses on products of high medical
value intended to address inadequately treated or uncommon diseases
within selected STMS. An STMS is a subset of a therapeutic area where
one or more products can be grouped to satisfy unmet needs. To assess
the viability of an STMS, the Company considers the following
questions:
* Are there unmet therapeutic needs as defined by the customer
(the patient or the health care practitioner)?
* Do product development or product acquisition opportunities
exist in order to build a profitable business in a particular
STMS?
* Can the Company build brand recognition and command
significant market share in a particular STMS?
* DIRECT SALES - With the identification of the Antidotes STMS, the
Company has built a small, specialized sales force, which began
promoting Antizol in December 1997. The sales force has extensive
knowledge of the Antidotes STMS, as well as extensive marketing and
business experience. The Company's sales force utilizes a consultative,
customer oriented approach to selling, which is aided by high quality
information systems. The Company expects to utilize a similar sales
force approach with the Oncology and Sleep Disorder STMS.
* ALLIANCES - The high medical value of the Company's products has
interested other companies seeking to market the Company's products
outside the U.S. To date, the Company has agreements with four
distributors relating to two of the Company's products, principally on
a "named patient" basis. The Company also believes that its
relationships with these distribution partners, among others, may
provide strategic benefits; possibly in the area of product acquisition
opportunities or in market share penetration programs.
* ATTRACTION OF POTENTIAL NEW PRODUCTS -- As the Company's strategy and
focus on products of high medical value within a selected STMS become
better known and understood by others in the research and development
community and as the Company proves its ability to market and sell into
an STMS, the Company expects more product development or acquisition
opportunities will be presented in the future.
RISK MANAGEMENT
The Company's strategy is designed, in part, to manage its overall business
risk. The Company is pursuing three distinct STMS rather than concentrating
financial, development and marketing resources on a single STMS or a single
platform technology. To reduce its product development risk, the Company
generally seeks to develop products that (1) may be on the market in other
dosage forms and are therefore well known to the medical community and to the
FDA, (2) have a straightforward formulation that can be synthesized in one or
two steps as opposed to requiring many steps, and (3) are not biotechnology
derived. In addition, the Company generally seeks to acquire products that are
already in Phase II or Phase III clinical trials, or in an earlier stage of
development if the Company believes there is a relatively high likelihood of
obtaining FDA approval. When a product is licensed without the equivalent of
Phase II or III data, the Company may conduct one or more "pilot clinical
trials" to better assess this likelihood. Each such pilot trial is narrowly
defined and has a separate budget that to date has not exceeded $500,000. Upon
the completion of such a pilot clinical trial, management seeks the approval of
the Board of Directors for authority to proceed to full development of the
product. The Company does not conduct basic research and does not attempt to
discover new drugs. The Company may also purchase rights to existing products in
order to reduce development risk. To reduce its marketing risk, the Company
generally attempts to obtain some form of proprietary protection, such as orphan
drug designation, patent protection, exclusive licensing agreements, predominant
market penetration or sole supplier agreements.
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PROPRIETARY RIGHTS
The Company believes it is important that its proposed products receive patent
protection or orphan drug designation or have other factors that limit potential
competition. All of the Company's products, except Antizol-Vet, have been
designated orphan drugs by the FDA and applications for such designation will be
made for any additional products to the extent available. A drug that has orphan
drug designation and which is the first product to receive marketing approval
for its product claim, indication or application receives orphan drug status and
is entitled to a seven-year exclusive marketing period in the United States for
that product claim, indication or application, subject to certain limitations.
The Company has three products with orphan drug status and one veterinary
product with four years of remaining exclusivity.
The license agreements pursuant to which the Company has acquired one of its
products include, and the Company expects that any licenses with respect to any
additional products will include, an assignment of the licensor's proprietary
rights with respect to the licensed product. United States patents with respect
to the use of the Company's proposed Busulfex product has been issued to another
organization or entity that has granted exclusive licensing rights to the
Company. Foreign patent applications have or are expected to be filed for
Busulfex. The Company evaluates the desirability of seeking patent or other
forms of protection for its products in foreign markets based on the expected
costs and relative benefits of attaining such protection.
OPERATING FUNCTIONS
The Company has structured each of its operating functions to support its
strategy. Following is a general explanation of the typical steps in the
Company's processes of product acquisition, development and marketing.
PRODUCT ACQUISITION
The Company is actively searching for product licensing opportunities within
selected strategic therapeutic market segments. The continual acquisition of
products for development and/or commercialization is a key element of the
Company's growth strategy. The Company attracts product acquisition proposals
through a network of customer and industry contacts, licensing brokers and a
growing awareness of its activities by governmental, academic and industry
sources. Since its inception, the Company has carefully evaluated numerous
product opportunities. To date, sixteen products have been acquired and, of
these, seven products are currently under development or being marketed.
The Company seeks to acquire pharmaceutical products within selected STMS that,
in the Company's opinion, generally:
* Are of high medical value as defined by the customer (physician or
patient) within a STMS;
* Are targeted at distinct patient populations;
* Are prescribed by physician specialists;
* Can be marketed with a small, specialized sales effort to health care
specialists, health care institutions, and patients;
* Are likely to be eligible for reimbursement by third-party payors;
* Have or are candidates for patent protection or orphan drug designation
or have other characteristics that enhance the Company's competitive
position;
* Treat diseases that have clinical endpoints (i.e., signs or symptoms)
that are readily measured;
* Are conventional pharmaceutical products that are relatively
straightforward in formulation and development, and do not involve the
application of new technologies;
* Are in Phase II or Phase III clinical trials and have a relatively high
likelihood of obtaining the approval of the FDA within three years of
their acquisition;
* Offer attractive potential financial returns with relatively
inexpensive development costs;
* "Fit" with other companion products in an existing STMS or can be
grouped with other products to build a new STMS.
In selecting additional products for potential inclusion in its portfolio, the
Company generally focuses on acquiring rights to medicines that serve distinct
patient populations. Many major drug companies and generic manufacturers
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are less likely to address these orphan drug and niche markets because they do
not believe that these markets are capable of producing acceptable revenues and
returns on their product development investments. This reluctance limits the
number of potential sources of competition. In addition, a product designed for
smaller patient populations is often eligible for orphan drug designation. By
obtaining orphan drug designation, the Company is granted exclusive marketing
rights or status in the United States for seven years, subject to certain
limitations, after an NDA for a product is approved, if the Company is the first
to receive approval for the designated drug and indication. This focus on
relatively small patient populations may reduce the likelihood that a single
product will account for a dominant portion of the Company's revenues.
The Company seeks to acquire potential products that already have, or will not
require, a substantial quantity of clinical data to demonstrate their relative
efficacy and safety. The Company also searches for product candidates that
represent new dosage forms of previously approved compounds because the Company
believes these types of products are more likely to be quickly approved by the
FDA and accepted by the medical community. In addition, the Company attempts to
develop medicines where there are clear clinical endpoints that demonstrate
their effectiveness. Generally, the Company seeks to acquire products that can
be developed to the point of FDA approval within three years of their
acquisition with expected development costs in the range of $1.0 to $7.0
million. Contrast this approach to the development of therapies for complex
diseases (e.g., Alzheimer's disease, AIDS, psychoses or complex cancers) that
can require a decade or more of development and involve the expenditure of tens
of millions of dollars or more. Typically, the Company also focuses its
development efforts on one indication and, when possible, one dosage form to
minimize development costs. Additional indications or dosage forms will only be
evaluated after the primary NDA is submitted.
An additional element of the Company's product development strategy is to
acquire products that have or can have a degree of proprietary protection.
Generally, this goal is accomplished by selecting products that are eligible for
orphan drug designation, are covered by patents or are the subject of an
exclusive license from a sole supplier or a manufacturer with specialized or
proprietary processes. The likely availability of adequate levels of
reimbursement from third-party payors is also an important factor in product
acquisition decisions.
The Company has established a Product Selection and Review Committee. This
Committee reviews all new product opportunities and makes recommendations to the
Board of Directors of the Company regarding the approval of any proposed
additional products. The product review process generally involves discussions
with customers (physicians and patients) within a given STMS to identify unmet
needs, and with the initial product developer and experts in the disease treated
by the drug; a review of research publications and other databases to gauge
competitive activities; market research aimed at identifying potential
acceptance by the end user; technical evaluations to determine manufacturability
and cost; expected FDA regulatory requirements to obtain acceptable marketing or
promotional claims; and a legal review of any relevant proprietary rights. If
this review indicates that the proposed product meets the Company's selection
criteria, efforts to negotiate a license are initiated. Generally, the Company
seeks to obtain licenses that require a minimal signing fee, are subject to
commercially acceptable royalty levels and, where appropriate, provide for the
continued involvement of the original developer in the development process
through a consulting or similar arrangement. In addition to developing its
current products, the Company is continually evaluating additional proposed
products within the selected STMS. Although the Company is actively discussing
licensing possibilities for several products, it does not have any binding
agreements or arrangements for the acquisition of any additional products.
Should the Company be unsuccessful in acquiring additional proposed products for
development and commercialization within a selected STMS, the Company may
reassess the viability of the selected STMS and redefine the selected STMS to
expand the number of potential products that might satisfy the Company's
acquisition criteria for a viable STMS.
PRODUCT DEVELOPMENT
Product development or research and development is the Company's principal
activity. The Company has incurred $ 18,205,416 in research and development
expense from January 1, 1993 (inception) through December 31, 1997.
A major element of the Company's product development strategy is to use
third-parties to conduct safety and efficacy testing and clinical studies, to
assist the Company in guiding products through the FDA review and approval
process, and to manufacture and distribute any developed products. The Company
believes that maintaining a minimal infrastructure will enable it to develop
products efficiently and cost effectively. To facilitate this strategy, the
Company utilizes a team approach or "Development Team" for each of its proposed
products. A Development Team is organized and managed by senior staff within the
Company's Development Department. The
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Development Team is cross-functional and includes in-house experts, as well as
appropriate outside consultants, to manage all development activities with
respect to a proposed product. Each Development Team designs a development plan
and budget for each proposed product and contracts with outside development
agents and consultants to arrange for the necessary clinical and toxicology
studies, manufacturing arrangements and FDA filings. Upon submission of the NDA
to the FDA, the management of each proposed product is undertaken by the
Company's Marketing and Sales Departments.
The Company believes the use of third parties to develop and manufacture its
products has several advantages. This approach generally allows a greater pool
of resources to be concentrated on a product than if these functions were
performed by internal personnel who were required to support all of the
Company's products. Although this approach will allow the Company to avoid the
expense associated with developing a large internal infrastructure to support
its product development efforts, it will result in the Company being dependent
on the ability of outside parties to perform critical functions for the Company.
This contract approach to product development requires project management by
professionals with substantial industry experience. The Company has in-house
experts in areas of critical importance to all of its proposed products who can
be consulted by the Development Teams. These areas include regulatory affairs,
marketing and sales, quality assurance, manufacturing, clinical trials
management, finance, information systems and general management.
The product development process is designed to identify any problems associated
with a proposed product's clinical aspects. The Company attempts to reduce the
risk that a proposed product will not be accepted in the marketplace by
conducting the market research and planning process concurrently with a
product's development. No drug development portfolio can be completely insulated
from potential failures and it is likely that some proposed products selected
for development by the Company will not produce the clinical or revenue results
expected. To date, the Company has terminated the development of a eleven
products and the associated expenditures based on clinical results or estimated
financial potential that was unacceptable to management.
MANUFACTURING
The Company does not have, and does not intend to develop, its own manufacturing
facilities. Instead, the Company will contract with third parties for the
manufacture of its products. The manufacture of the Company's current products
will be subject to good manufacturing practices ("GMP") prescribed by the FDA or
other standards prescribed by the appropriate regulatory authorities in the
country of use. The Company has established a quality assurance program to
monitor third-party manufacturers of its products to promote compliance by such
manufacturers with domestic and foreign regulations (based on country of use).
The Company has also established a production planning program to ensure
manufacturing logistics are carried out by contract manufacturers. The Company
has entered into long-term manufacturing and supply agreements for several of
its current products. The Company believes that qualified manufacturers are and
will be available to manufacture its proposed products, although there can be no
assurance that this will be the case.
MARKETING -- UNITED STATES
The Company has designed its product selection strategy to maximize the success
of its marketing efforts. By having products that current and potential
customers have identified as having "high medical value", the Company believes
it should be able to more easily attract the attention of the medical community.
The Company also believes that its focus on well-defined patient populations
will eliminate the need for a large, specialized sales force. Because of the
distinct nature of most of its potential markets, the Company expects to be able
to concentrate its marketing efforts on a limited number of medical specialists,
or on patients themselves.
As part of its marketing efforts, the Company identifies and defines appropriate
STMS, identifies customer needs within each STMS, identifies specific product
acquisition candidates within each STMS, and if FDA approval is obtained,
designs and implements marketing plans for each of its approved products. Market
research is conducted to analyze the potential of products prior to their
acquisition. Once a product is acquired and is being developed, further market
research is completed and, based on this analysis, the product's marketing plan
is developed. Upon submission to the FDA of a proposed product's NDA, the
product management responsibilities shift from the
<PAGE>
Development Team to the Company's Marketing and Sales Departments. The Company's
Marketing and Sales Departments are responsible for all aspects of a product's
marketing introduction and commercialization, including product forecasting,
defining product positioning, price, promotion and physical distribution to
successfully commercialize the product. Senior sales and marketing employees
lead a cross functional team of internal personnel and external consultants to
implement a product's marketing plan and commercialization.
MARKETING -- FOREIGN
The Company intends to identify foreign partners (usually pharmaceutical
companies) to market and distribute some of its current products. The Company
considers Europe, Japan and Canada to be its most attractive foreign markets.
The Company has entered into marketing and distribution agreements for Antizol
and Cystadane in Europe and has initiated discussions with several companies to
potentially market and distribute Elliotts B Solution and Sucraid. In general,
the Company expects to license foreign marketing and distribution rights after
an NDA is submitted in the United States.
DISTRIBUTION
The Company does not intend to develop internal physical distribution
capabilities because the Company believes its relatively low-volume products can
be more economically and efficiently distributed through outside distribution
organizations. The physical distribution of the Company's products through third
parties allows the Company to avoid some of the costs associated with developing
internal information systems that comply with regulatory requirements and
satisfy customer service demands. Cystadane is currently distributed by
Chronimed, which distributes this product directly to patients through its mail
order pharmacy. The Company believes this method of distribution is appropriate
for this chronic use product. Elliotts B Solution and Antizol are primarily used
in a hospital setting and are distributed by Cord Logistics, a subsidiary of
Cardinal Health. This method of distribution allows sales directly into
hospitals or, if customers prefer, through their primary distribution agent.
Antizol-Vet is a product used in veterinary clinics. The Company has an
agreement with W.A. Butler Company, the largest distributor of veterinary
products in the United States, to exclusively distribute Antizol-Vet. The
Company is currently evaluating the distribution of Antizol-Vet and will attempt
to maximize sales potential for this products.
In June 1997, the Company and Chronimed announced the termination of their
Marketing and Distribution Agreement dated July 2, 1994. Under the terms of the
Marketing and Distribution Agreement, Chronimed had the exclusive right to
distribute Caprogel, Busulfex, Antizol and Colomed for a period of at least
three years following the date of first delivery of a commercial shipment of any
such product. As part of the termination of the Marketing and Distribution
Agreement, the Company is obligated to pay Chronimed compensation, consisting of
cash and shares of the Company's Common Stock, equal to $2,500,000 over an
estimated twelve to twenty four months. To date, the Company has paid Chronimed
approximately $260,000 in cash compensation and expects to issue approximately
61,000 shares of Common Stock to Chronimed on March 31, 1998.
COMPETITION
Potential competitors in the United States are numerous and include
pharmaceutical, chemical and biotechnology companies. The Company will
experience competition in several specific areas, including those described
below.
* PRODUCT ACQUISITION -- The Company intends to acquire the rights to
products with important therapeutic advantages that generally are not
of interest to larger pharmaceutical companies. Nevertheless, the
Company will compete with other entities in acquiring product rights
from universities and other research institutions, as well as other
potential licensors.
* PRODUCT DEVELOPMENT RESOURCES -- The Company will compete for certain
resources, such as the services of clinical investigators, contract
manufacturers, advisors and other consultants. The Company will
generally have little or no control over the allocation of such
resources.
* ORPHAN DRUG DESIGNATION -- The Company is aware of two other companies
that have filed for and received orphan drug designation on products
similar to three of its products. Sparta Pharmaceutical and Biocraft
have been granted orphan drug designations for their intravenous
busulfan and sodium oxybate, respectively. Intravenous busulfan and
sodium oxybate are the equivalent of the Company's Busulfex and Xyrem
products, respectively. While the Company is not aware of others
holding or seeking orphan drug designations for
<PAGE>
products that would compete with the Company's products for NDA
approval, there can be no assurance that the Company's products will
not have such competition for the protection conferred by orphan drug
status.
* MARKETING AND SALES -- Each of the Company's current products will face
competition from other products or from other therapeutic alternatives.
In general, the Company's current products will compete against
products whose marketers have substantially greater resources,
including large specialized sales forces, than the Company.
GRANTS
The FDA Office of Orphan Drug Products, as well as the Small Business
Administration, offer grants to companies whose efforts meet certain
requirements. Orphan Drug grants and Small Business Innovation Research (SBIR)
grants may be available to fund aspects of the Company's development efforts. To
date, the Company has received four FDA Orphan Drug grants and one SBIR grant
totaling approximately $1,900,000 to support certain development activities for
Busulfex, Colomed, Antizol and Intrachol. Through January 31, 1998, the Company
has been reimbursed approximately $1,195,000 for development expenditures
related to these Orphan Drug and SBIR grants. Due to the Company's decision to
phase out Colomed and Intrachol, the Company does not expect to utilize
approximately $200,000 of the grant awards allocable to these products. In
addition, approximately $300,000 of the $1,900,000 is allocable to subsequent
periods of a multi-year Orphan Drug grant awarded in late 1996 for Busulfex, the
payment of which is conditional upon the FDA Office of Orphan Drug Products
funding this grant in such subsequent periods. There can be no assurance that
the FDA will fund multi-year awards for the Busulfex Orphan Drug grant after the
current budget year nor can there be any assurance that the Company will fully
collect the grant proceeds on any grant it presently has or may have in the
future.
GOVERNMENT REGULATION
GENERAL.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Several potential
approaches are under consideration, including mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, price
discounts from drug manufacturers, the creation of large purchasing groups and
other significant changes to the health care delivery system. In addition, some
states have adopted or are considering various health care reform proposals. The
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery systems and payment methods and that
public debate of these issues will likely continue in the future. Because of
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company or its prospects.
REIMBURSEMENT.
Employers, through payments to their employee benefit plans, bear a significant
share of the health care costs of their employees. These plans are typically
administered by insurance companies, health maintenance organizations, preferred
provider organizations and other third-party payors. Health care services and
products, including pharmaceutical products, are also paid for by government
agencies, such as Medicaid. Employers and the payors involved in providing or
administering health care benefits are increasingly turning to "managed care"
systems to control health care costs. Under these systems, the administrative
requirements and standards of care are established by the health care purchasers
and providers and the benefit level depends on the negotiated price. Managed
care systems usually limit treatment options to approved therapeutic regimens
and "formularies," or lists of approved drugs and medical products.
Being included on the formularies of managed care groups is important to the
commercial success of a prescription medicine. A pharmaceutical must be included
on a third-party payor's formulary or must be deemed "medically necessary" to be
eligible for reimbursement by that payor. In deciding whether a drug is to be
included on a formulary, payors will generally consider its therapeutic value
and cost in comparison to other available treatments. The Company believes that
the proprietary nature and medical usefulness of its proposed products should
assist it in
<PAGE>
its efforts to have its products approved for reimbursement. No assurance can be
given, however, that the Company's products will be approved for reimbursement
by third-party payors at acceptable levels, or at all.
PRODUCT APPROVALS.
The Company's products require FDA approvals in the United States and comparable
approvals in foreign markets before they can be marketed.
MANUFACTURING REGULATION.
All facilities and manufacturing techniques used to manufacture products for
clinical use or sale in the United States must be operated in conformity with
GMP, the FDA requirements governing the production of pharmaceutical products.
The Company has established a quality assurance program to monitor third-party
manufacturers of its products to promote compliance by such manufacturers with
domestic and foreign regulations (based on country of use).
FOREIGN REGULATION.
Products marketed outside of the United States are subject to regulatory
approval requirements similar to those required in the United States, although
the requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. No action can be
taken to market any product in a country until an appropriate application has
been approved by the regulatory authorities in that country. The current
approval process varies from country to country, and the time spent in gaining
approval varies from that required for FDA approval. In certain European
countries, the sales price of a product must also be approved. The pricing
review period often begins after market approval is granted. The Company intends
to utilize foreign partners to apply for foreign marketing approvals.
INSURANCE
Providing health care products entails an inherent risk of liability. In recent
years, participants in the health care industry have been subject to a large
number of lawsuits alleging malpractice, product liability or related legal
theories, many of which involve large claims and significant defense costs. The
Company may from time to time be subject to such suits as a result of the nature
of its business. The Company carries product liability insurance coverage in the
aggregate amount of $10 million. The Company also carries a $2 million general
business insurance policy. There can be no assurance, however, that such
insurance policies will be sufficient to fully indemnify the Company against any
asserted claims or that such insurance will continue to be available.
HUMAN RESOURCES
The Company has thirty full-time and three part-time employees. The Company
believes that its relationship with its employees is good. None of the Company's
employees is represented by a labor union.
TRADE SECRETS
The Company also relies on trade secrets and proprietary know-how to protect
certain of its technologies and potential products. The Company requires
employees, consultants and advisors to enter into confidentiality agreements
that prohibit disclosure to any third party or use of such secrets and know-how
for commercial purposes. Company employees also agree to disclose and assign to
the Company all methods, improvements, modifications, developments, discoveries
and inventions conceived during their employment that relate to the Company's
business. There can no assurance, however, that these agreements will be
observed and prevent disclosure or provide adequate protection for the Company's
confidential information and inventions.
PHASED OUT/TERMINATED DEVELOPMENT PROJECTS
In September 1997, the Company initiated a plan to phase out nine development
projects and recorded a one-time charge to earnings of $780,000 for the
estimated future costs to complete the phase-out of these projects. The Company
took this action in order to focus its efforts and resources on three distinct
markets within selected STMS.
<PAGE>
The development projects are being phased out include: Colomed, Caprogel,
Clonidine, alpha-galactosidase A, colloidal bismuth subcitrate, Intrachol,
Repliderm, 5FU (5-fluorouracil), and other indications of Cystadane. The
phase-out of several of these projects is expected to occur over at least a
twelve month period because of commitments the Company has made to clinical
sites to complete clinical trials in process. The Company is evaluating the
potential of a sale or licensing of its rights to one or more of these
development projects, but there can be no assurance that the Company will be
able to do so.
Since inception, the Company has phased out or terminated a total of eleven
development projects from its product portfolio. In addition to the nine
development projects phased out in 1997, the Company terminated development of
glucaric acid in 1996 and L-Cycloserine in 1994.
OTHER
In December 1997, Dr. Bertram Spilker resigned his position as President of the
Company and as a member of the Board of Directors. Dr. Spilker will be the
Company's Chief of Medical Affairs through 1998. As Chief of Medical Affairs,
Dr. Spilker will advise the company on matters relating to development of its
drugs and assist with FDA approvals and other regulatory matters. Due to the
resignation of Dr. Spilker, the Company engaged Dr. Michael Fox, President of
Healthcare Advisors, Inc., to assist with the management of its development and
regulatory operations, including advising the Company's Development Teams.
<PAGE>
PRODUCTS
The following tables summarize certain information relating to the Company's
products:
<TABLE>
<CAPTION>
MARKETED PRODUCTS
- ----------------------------------------------------------------------------------------------------------
U.S. Patent
NDA Issued or Orphan Drug
Approval Applied Designation
Approved Product and STMS Application Date For* ***
- ------------------------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
I. ANTIDOTES STMS
Antizol(TM) (fomepizole) Ethylene glycol (antifreeze) December No Orphan Drug
Injection and methanol poisoning in 1997 Status Granted
humans
II. ONCOLOGY SUPPORT STMS
Elliotts B(R)Solution Diluent for intrathecal September No Orphan Drug
(buffered intrathecal injection of 1996 Status Granted
electrolyte/dextrose chemotherapeutic drugs
solution) delivered into cerebrospinal
fluid
III. OTHER
Cystadane(R)(betaine Homocystinuria, a genetic October No Orphan Drug
anhydrous for oral solution) disease 1996 Status Granted
Antizol-Vet(TM) (fomepizole) Ethylene glycol (antifreeze) November No Five year
for Injection poisoning in dogs 1996 period of
exclusivity
</TABLE>
<TABLE>
<CAPTION>
PRODUCTS UNDER DEVELOPMENT
- -----------------------------------------------------------------------------------------------------
U.S. Patent
Phase of Issued or Orphan Drug
Development Applied For Designation
Proposed Product and STMS Application ** For* ***
- ------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. ONCOLOGY SUPPORT STMS
Busulfex(TM) (busulfan) Chemotherapy in bone II/III Yes Yes
for Injection marrow transplant patients
II. SLEEP DISORDERS STMS
Xyrem(TM) (sodium oxybate) Narcolepsy II No Yes
III. OTHER
Sucraid(TM) (sacrosidase) Congenital isomaltase III No Yes
oral solution sucrase deficiency
("CSID"), a genetic disease
</TABLE>
* The patents are owned by third parties from whom the Company has obtained
exclusive licensing rights.
** Development Phases are discussed under "Business - The Regulatory Process".
*** Orphan Drug Designation and Status are discussed under "Business - Orphan
Drug Act".
<PAGE>
ANTIZOL (FOMEPIZOLE) INJECTION
Antizol, the first of the Company's products in the Antidotes STMS, received
marketing clearance from the FDA on December 4, 1997 and shipments on advance
orders began on December 16, 1997. General commercial availability and the
marketing launch of Antizol commenced in January 1998. Antizol is primarily used
in a hospital setting and is distributed for the Company by Cord Logistics, a
subsidiary of Cardinal Health. Antizol is the first drug indicated as an
antidote for ethylene glycol poisoning, or to treat suspected ethylene glycol
ingestions. When ingested by humans, ethylene glycol (found in antifreeze) and
methanol (found in windshield wiper fluid) can lead to death or permanent and
serious physical damage. In a survey conducted in 1996 by the American
Association of Poison Control Centers, over 6,000 cases of ethylene glycol
poisoning were reported to United States poison control centers. In the same
year, there were about 600 treatments. Because it is important to treat poisoned
patients very quickly in order to improve the chances of successful recovery,
the Company believes that hospital pharmacies will stock at least a minimum
quantity of Antizol.
The Company, through a sublicense agreement with Mericon Investment Group, Inc.,
has an exclusive, worldwide license to develop and market Antizol. Antizol is a
known compound and is not patentable. The Company has successfully contracted
for the production of Antizol under GMP conditions. The Company has obtained
orphan drug status for Antizol as an antidote to treat methanol or ethylene
glycol poisonings, which provides marketing exclusivity to the Company through
December 4, 2004.
Studies on treatment with Antizol for methanol poisoning and to determine dosing
in pediatric cases are ongoing. A supplemental NDA covering the methanol
indication is expected to be submitted to the FDA in the second half of 1998.
ELLIOTTS B SOLUTION (BUFFERED INTRATHECAL ELECTROLYTE/DEXTROSE SOLUTION)
Elliotts B Solution, the first of the Company's products in the Oncology Support
STMS, received marketing clearance from the FDA in September 1996. The first
commercial sales of Elliotts B Solution occurred in December 1996. Elliotts B
Solution is primarily used in a hospital setting and is distributed for the
Company by a subsidiary of Cardinal Health. Elliotts B Solution is a buffered
diluent for the intrathecal administration (injection into the spinal cord) of
chemotherapeutic agents. Intrathecal injections are the most common injections
made in treating acute lymphoblastic leukemia ("ALL"). ALL is the most prevalent
form of leukemia in children. Due to advances in chemotherapy, the cure rate for
ALL has improved dramatically in the past 30 years, going from almost zero to
nearly 75% today. As a part of modern chemotherapy, doctors often administer a
series of up to 20 injections of methotrexate sodium into the cerebrospinal
fluid of patients. It is estimated that cerebrospinal injections of methotrexate
sodium are administered to about 6,000 people in the United States, and
approximately the same number of people in the Company's anticipated foreign
markets, on an annual basis. Elliotts B Solution is comparable in pH,
electrolyte composition, glucose content and osmolarity to cerebrospinal fluid.
From 1976 to 1992, the National Cancer Institute provided Elliotts B Solution
without charge to treatment facilities for use in clinical trials as a diluting
solution for the intrathecal administration of methotrexate sodium. The Company
believes the familiarity with Elliotts B Solution on the part of clinicians and
pharmacists will prove helpful in gaining sales. The Company has obtained orphan
drug status for the use of Elliotts B Solution as a diluent for methotrexate
sodium or cytarabine, which provides marketing exclusivity through September 26,
2003. Elliotts B Solution is not patentable for the Company's proposed use. No
license was required for the Company to develop and market Elliotts B Solution.
CYSTADANE (BETAINE ANHYDROUS FOR ORAL SOLUTION)
FOR HOMOCYSTINURIA
Cystadane received marketing clearance from the FDA in October 1996. The first
commercial sales of Cystadane occurred in December 1996. While Cystadane does
not fit into an identified STMS, the Company believes that the small size of the
market and Cystadane's high medical value justify the limited resources required
to continue making this product available to patients. Chronimed distributes
Cystadane directly on a non-exclusive basis to patients in the United States
through its mail order pharmacy. It is the first agent approved by the FDA for
the
<PAGE>
treatment of homocystinuria, an inherited metabolic disease. The clinical
consequences are wide-ranging and include dislocation of the ocular lens, early
(under age 30) thromboembolism, developmental and mental retardation and reduced
life span related to elevated plasma homocysteine levels. It has been estimated
that homocystinuria occurs about once in every 200,000 live births worldwide.
There are approximately 1,000 patients with homocystinuria in the United States.
Cystadane is a known compound which has already been used to treat
homocystinuria and is, therefore, not patentable for this indication. No license
was required for the Company to develop and market Cystadane. The Company has
obtained orphan drug status for Cystadane for the treatment of homocystinuria,
which provides marketing exclusivity to the Company through October 24, 2003.
FOR HYPERHOMOCYSTEINEMIA
The Company is sponsoring a study regarding the use of Cystadane to treat
hemodialysis patients with hyperhomocysteinemia. However, the Company does not
expect to sponsor any additional studies nor does it expect to file a supplement
to its approved NDA for Cystadane with respect to this potential additional
indication.
FOR OTHER POTENTIAL INDICATIONS
The Company has sponsored studies for potential additional indications for
Cystadane in cardiovascular, liver disease and central nervous system disorders.
However, the Company has determined that it will not sponsor any additional
studies and it will not to file a supplement to the its approved NDA for
Cystadane with respect to these potential additional indications.
ANTIZOL-VET (FOMEPIZOLE) FORINJECTION
In November 1996, the Center for Veterinary Medicine of the FDA approved
Antizol-Vet for dogs that have ingested or are suspected of having ingested
ethylene glycol. The first commercial sales of Antizol-Vet occurred in late
January 1997. Antizol-Vet is available exclusively through W.A. Butler Company,
the largest distributor of veterinary pharmaceuticals in the United States. It
is estimated that at least 10,000 cases of ethylene glycol poisoning occur in
dogs each year. The earlier an ethylene glycol poisoned dog is treated with
Antizol-Vet, the more likely that there will be a positive outcome. Antizol-Vet
is legally entitled to a five-year exclusive marketing period through November
2001. The Company, through a sublicense agreement with Mericon Investment Group,
Inc., has an exclusive worldwide license to develop and market Antizol-Vet.
Sales of Antizol-Vet in 1997 did not meet the Company's expectations. The
Company has determined that Antizol-Vet does not fit into its STMS strategy.
Further, the Company does not have the marketing and sales resources required to
maximize this product's sales potential within the veterinary market.
Accordingly, the Company is evaluating the potential sale or licensing of its
rights to this product.
BUSULFEX (BUSULFAN) FOR INJECTION
Leukemias and lymphomas are often fatal diseases that are characterized by a
progressive proliferation of abnormal white blood cells in the blood and body
tissues. If untreated, they lead to severe anemia, hemorrhages and eventual
death. Bone marrow and stem cell transplants (collectively "BMTs") are now
considered to be one of the more effective treatments currently available for
patients with certain types of these diseases. It is estimated that by the year
2000 more than 20,000 BMTs will be done each year for leukemia and lymphoma
patients worldwide, half of which will be done in the United States. Of these
20,000 procedures, approximately 7,000 are expected to receive busulfan as part
of the pre-transplantation conditioning regimen. Use of BMTs are growing in the
treatment of solid tumors, such as breast cancer and some non-oncologic
disorders. The Company expects its intravenous form of busulfan may be used in
the treatment of these types of solid tumors, but additional trials will be
required.
One of the many complex steps in performing a BMT includes killing the patient's
abnormal white blood cells. In the past, total body irradiation was used for
this purpose. This type of radiation treatment, however, is associated with
several adverse side effects, including damage to the blood vessels of various
internal organs, occlusions of veins in the liver (veno-occlusive disease) and
degeneration of the white matter of the brain. Researchers
<PAGE>
discovered, however, that certain types of drugs, termed "chemotherapeutic"
drugs, can also be used to kill abnormal white blood cells. Busulfan is a
chemotherapeutic drug that is currently available only in oral form, but this
form of busulfan can adversely affect the liver and lungs and can lead to fatal
failure of either organ. An additional drawback arises because of busulfan's
poor solubility in water. As a result, busulfan is currently available only in
tablets. Because a BMT requires high dosages of busulfan, patients are required
to take large numbers of tablets, usually more than 100 per day for four days,
in order to absorb enough of the drug to achieve the desired therapeutic
effects. This requirement has limited the use of busulfan for BMT procedures,
particularly those involving children. Further, the severe nausea and vomiting
that accompanies the administration of oral busulfan leads to loss of some or
all of the administered dose.
Insufficient dosage levels of busulfan may not completely destroy the abnormal
white blood cells and may result in the patient relapsing after the BMT.
Conversely, if the busulfan dosage is too high, the risk of damage to the liver
or lungs is increased and the framework upon which the new bone marrow is placed
could be damaged, resulting in poor engraftment of the new marrow. An additional
complication arises because intestinal absorption of oral busulfan is erratic
due to differences among patients in their nutritional states and the effects of
other drugs on their gastrointestinal system.
The Company has an exclusive, worldwide license agreement with the M.D. Anderson
Cancer Center at the University of Texas to develop and market an intravenous
form of busulfan that will be called Busulfex. Because the drug would not enter
the patient's gastrointestinal system, vomiting is less likely and dosage
levels, therefore, should be more accurately controlled. The intravenous form of
the drug bypasses the liver, which should result in reduced liver toxicity
rates. These factors may lead to improved safety and an improved likelihood that
the BMT will be successful. An increased success rate is important given that
the average cost of a BMT in the United States exceeds $100,000. The Company may
evaluate further whether liver and lung toxicity rates are reduced through the
use of Busulfex after the product is approved for sale.
Many other drugs are currently being developed for use in the BMT area. Although
most of these new drugs treat bone marrow cells removed from the body as a part
of a BMT and are not chemotherapeutic drugs, some of them may compete with
Busulfex. In addition, the Company is aware that Sparta Pharmaceutical has been
granted orphan drug designation for its intravenous busulfan in BMT procedures
and is currently developing its own form of intravenous busulfan.
A contract manufacturer has been located. The M.D. Anderson Cancer Center has
obtained a patent covering Busulfex and orphan drug designation has been
obtained by the Company. The Company has an IND and clinical trials to support a
marketing application are complete. The Company expects to report the results of
the phase II/III clinical trials during the first half of 1998 and plans to
submit an NDA for Busulfex during the third quarter of 1998. If the NDA for
Busulfex is approved, Busulfex will be the second product in the Company's
Oncology Support STMS. The Company plans to market Busulfex to oncologists who
conduct BMTs at cancer treatment centers in the United States.
XYREM (SODIUM OXYBATE)
Narcolepsy is a chronic neurologic disorder characterized by excessive daytime
sleepiness, unavoidable daytime sleep episodes, cataplexy or sudden loss of
muscle control, brief periods of muscle paralysis and hallucinations when
awakening or falling asleep. Other related symptoms include disturbances of
auditory and visual perception, lapses of consciousness and memory problems.
These symptoms can lead to a variety of complications, such as driving or
machine accidents, difficulties at work resulting in disability, forced
retirement or job dismissal, and depression. Narcolepsy is thought to affect
between 100,000 and 180,000 patients in the United States. Although the peak age
of reported symptoms is between 15 to 25 with a smaller peak occurring between
35 and 45, symptoms have been noted in persons as young as five years old.
The usual treatment for narcolepsy includes symptomatic treatment of daytime
drowsiness and sleep attacks with stimulants. The symptoms of cataplexy, sleep
paralysis and hallucinogenic dreams are typically treated with tricyclic
antidepressants. These treatment regimens, in addition to being only minimally
effective, are often
<PAGE>
unsatisfactory for a number of other reasons. Amphetamines and other stimulants
often cause undesirable side effects of insomnia, hypertension, palpitations,
irritability and, at higher doses, may mimic the symptoms of schizophrenia. The
tricyclic antidepressants can cause the side effects of dry mouth, impotence,
loss of libido, rapid heart beats and drug tolerance. Xyrem is a naturally
occurring substance found in many human tissues. Previous clinical studies with
Xyrem suggest that it is a safe, nontoxic substance that is effective in the
treatment of narcolepsy. When administered at night, it has been shown to
improve night-time sleep and to control cataplexy, sleep paralysis and
hallucinations. More than 180 narcolepsy patients have been exposed to clinical
doses with no consistent ill effects for up to 15 years of treatment. Xyrem does
not appear to have the side effects associated with tricyclic antidepressants.
Narcoleptic patients could be treated with Xyrem at night and, if needed, with
stimulants during waking hours.
Xyrem is a known compound that has already been used to treat narcolepsy and is
not patentable for this indication. No license was required for the Company to
develop Xyrem. The Company has, however, received orphan drug designation for
Xyrem. The Company has an IND and controlled clinical trials are ongoing. Sodium
oxybate has been reported to be abused and may be designated a "scheduled drug"
under the Controlled Substances Act and/or by various state agencies. A
scheduled drug must be manufactured, sold, distributed and used according to
strict regulations.
The Company is aware that Cephalon, Inc. has reported it has received an
approvable letter from the FDA for its Provigil(R) (Modafinil). Provigil is
intended to treat daytime sleepiness relating to narcolepsy and is not expected
to be used to treat cataplexy.
The Company expects to report the results of clinical trials relating the
Xyrem's efficacy and safety during the first half of 1998 and plans to meet with
the FDA in the second half of 1998 regarding its plans for the submission of an
NDA. Depending on the outcome of the Company's meeting with the FDA, and on any
additional work required by the FDA in support of an NDA, the Company expects
that an NDA can be submitted in 1999. If an NDA is submitted and approved by the
FDA, Xyrem will be the Company's first product in the Company's Sleep Disorder
STMS.
SUCRAID (SACROSIDASE) ORAL SOLUTION
Sucraid is replacement for an enzyme in the small intestine that is necessary to
the digestion of sucrose, which is common table sugar. A genetic deficiency of
this enzyme results in a disorder known as Congenital Sucrase-Isomaltase
Deficiency ("CSID"). The primary symptoms of CSID include severe watery
diarrhea, chronic malabsorption and failure to thrive (in infants and toddlers).
Other common symptoms include nausea, vomiting, abdominal cramps and abdominal
pain following the consumption of foods containing sucrose. Based upon medical
literature, it is estimated that between 10,000 and 50,000 persons in the United
States suffer from CSID; however, it is unknown how many patients experience
symptoms that are severe enough to seek treatment for this condition. The
Company estimates that the initial market for Sucraid will be quite small.
Presently, the only specific treatment of CSID consists of a life-long adherence
to a sucrose-free diet. In many patients, starch consumption must also be
limited. Compliance with a sucrose-free diet is very difficult because sucrose
is found in many foods in the typical American diet. Nonspecific symptomatic
treatments include antidiarrheal, antispasmodic and antiflatulence drugs, all of
which are limited in their efficacy.
Sucraid is a specific replacement of the missing enzyme responsible for CSID.
Hartford Hospital has granted the Company exclusive worldwide rights to the data
on Sucraid for CSID, including the results of two randomized controlled clinical
trials. The Company has received orphan drug designation for Sucraid, but it is
unlikely that patent protection can be obtained. An NDA for Sucraid was
submitted by the Company in May 1997 for the use of Sucraid as an enzyme
replacement therapy for the treatment of genetically determined sucrase
deficiency, which is part of CSID. In November 1997, the FDA notified the
Company that the NDA for Sucraid was approvable pending final product labeling
and FDA chemistry questions. The Company expects that the NDA approval and the
commercial introduction of Sucraid to a limited patient population will occur in
the second quarter of 1998. While Sucraid does not fit into an identified STMS,
the Company believes that the small size of the market and its high
<PAGE>
medical value justify the limited resources required to make this product
available to patients. The Company expects to distribute Sucraid direct to
patients through NEXUS, a subsidiary of Cardinal Health.
ITEM 2. PROPERTIES
The Company currently occupies approximately 8,895 square feet of leased office
space at a monthly rent of approximately $10,430, including operating expenses.
This lease expires in December 31, 1998. The Company believes its current
facilities will be adequate for its presently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 1, 1998.
Name Age Title
---- --- -----
John Howell Bullion 46 Chief Executive Officer and Director
Dayton T. Reardan, Ph.D. 42 Vice President of Regulatory Affairs
Patti A. Engel 37 Vice President of Marketing & Sales
Executive officers of the Company serve at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or among
any of the executive officers or directors of the Company.
Mr. Bullion has been Chief Executive Officer of the Company since June 24, 1994.
Mr. Bullion is a co-founder of Chronimed and has been a director of Chronimed
since 1985. Since September 1993, Mr. Bullion has been President of Bluestem
Partners, Ltd., which invests in and provides management services to developing
businesses. From March 1992 to July 1993, Mr. Bullion served as President of
Dahl & Associates, an environmental soil and ground water remediation company.
Prior to joining Dahl & Associates, Mr. Bullion served for one year as President
of Concurrent Knowledge Systems, Inc.
Dr. Reardan has been the Company's Vice President of Regulatory Affairs since
May 1995 and had been the Director of Regulatory Affairs since joining the
Company in 1994. From 1993 to 1994, he was Director of Development at CV
Therapeutics. From 1984 to 1993, he held a variety of management positions at
Xoma Corporation, most recently Director of Project Management.
Ms. Engel has been the Company's Vice President of Marketing & Sales since May
1995 and had been Director of Marketing for the Company since joining the
Company in 1994. From 1984 to 1994, Ms. Engel held a variety of sales and
marketing management positions with 3M Pharmaceuticals, a division of the 3M
Company. Prior to joining 3M, Ms. Engel was a practicing nurse in the field of
pediatric oncology.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the National Market tier of The Nasdaq
Stock Market under the Symbol: ORPH. The following table sets forth the
quarterly high and low sales prices for the Company's Common Stock for the years
ended December 31, 1996 and December 31, 1997.
High Low
--------------------------
YEAR ENDED DECEMBER 31, 1996
January 1, 1996 through March 31, 1996 $9.750 $5.375
April 1, 1996 through June 30, 1996 $10.250 $7.250
July 1, 1996 through September 30, 1996 $11.125 $6.875
October 1, 1996 through December 31, 1996 $11.125 $7.875
YEAR ENDED DECEMBER 31, 1997
January 1, 1997 through March 31, 1997 $9.625 $4.172
April 1, 1997 through June 30, 1997 $6.500 $3.500
July 1, 1997 through September 30, 1997 $8.875 $5.000
October 1, 1997 through December 31, 1997 $8.000 $4.500
As of March 24, 1998, the Company's Common Stock was held by 285 shareholders of
record and the Company estimates that there were approximately 4,400 beneficial
owners of its Common Stock on such date.
The Company has never declared or paid any dividends and does not anticipate
paying dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain future earnings, if any, for use in the Company's
business. The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial condition and requirements, restrictions in financing
agreements, business conditions and other factors.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, December 31, December 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,150,877 $ 3,927,945 $ 5,029,682 $ 3,186,328
Working capital 4,479,714 14,538,893 7,317,554 3,736,121
Total assets 8,238,950 17,150,599 8,987,362 4,087,599
Deficit accumulated during the development
stage (26,196,538) (14,808,669) (7,191,485) (2,033,538)
Total shareholders' equity 3,645,902 14,795,331 7,493,990 3,850,171
</TABLE>
<PAGE>
FINANCIAL RESULTS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) Period from
For the Year For the Year For the Year For the Six January 1, 1993
Ended Ended Ended Months Ended (Inception) to
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 634,838 $ 36,681 $ -- $ -- $ 671,519
Operating expenses:
Cost of sales 297,727 10,446 -- -- 308,173
Research and development 6,482,004 6,248,381 4,100,502 727,404 18,205,416
Sales and marketing 3,330,988 399,444 -- -- 3,730432
General and administrative 2,461,344 1,854,273 1,496,113 510,556 6,567,491
------------ ------------ ------------ ------------ ------------
Loss from operations (11,937,225) (8,475,863) (5,596,615) (1,237,960) (28,139,993)
Other income:
Interest 549,356 858,679 438,668 96,752 1,943,455
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during the
development stage $(11,387,869) $ (7,617,184) $ (5,157,947) $ (1,141,208) $(26,196,538)
============ ============ ============ ============ ============
Basic and diluted loss per
common share $ (1.87) $ (1.43) $ (1.89) $ (.96) $ (7.92)
============ ============ ============ ============ ============
Weighted average number of
shares outstanding 6,074,342 5,331,356 2,734,680 1,184,712 3,303,980
============ ============ ============ ============ ============
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Orphan Medical, Inc., a development stage company, was incorporated on June 17,
1994 in order to carry on the business previously conducted by the Orphan
Medical Division of Chronimed Inc. The activities of the Orphan Medical
Division, formed in January 1993, and the Company, since its incorporation, have
consisted primarily of obtaining the rights for pharmaceutical products, hiring
the personnel required to implement the Company's business plan, managing the
development of these products and preparing for the commercial introduction of
four products. Elliotts B Solution and Cystadane were first sold commercially
late 1996, followed by Antizol-Vet in early 1997 and Antizol in late 1997. As of
December 31, 1997, approximately $24,227,882 of cash has been used to fund
operating activities since January 1, 1993 (inception). The Company does not
expect to achieve profitable operations until at least 1999.
RESULTS OF OPERATIONS
In 1995, the Company changed from a June 30 fiscal year to a calendar year,
resulting in a shortened fiscal year of six months from July 1, 1995 to December
31, 1995. Management's discussion and analysis of results of operations includes
a comparison of audited financial results for the twelve months ended December
31, 1996 to the unaudited financial results for the twelve months ended December
31, 1995, and a comparison of the audited financial results for the six months
ended December 31, 1995 to the unaudited financial results for the six months
ended December 31, 1994.
TWELVE MONTHS ENDED DECEMBER 31, 1997 (AUDITED) VS. TWELVE MONTHS ENDED DECEMBER
31, 1996 (AUDITED)
The Company had approximately twelve months of sales for three of its products
in 1997, whereas it had approximately one month of sales for two of its products
in 1996. In addition, the Company commenced shipping Antizol for the first time
in December 1997. Sales increased from $36,681 for the twelve months ended
December 31, 1996 to $634,838 for the twelve months ended December 31, 1997. The
Company expects sales of Antizol-Vet,
<PAGE>
which were $363,902 in 1997, to decrease and it is currently evaluating the
potential sale or licensing of its rights to this product. Sales will fluctuate
from quarter to quarter and from year to year depending on, among other factors,
demand for the Company's products, new product introductions and the Company's
ability to optimize distribution of its approved products.
Cost of sales increased from $10,446 for the twelve months ended December 31,
1996 to $297,727 for the twelve months ended December 31, 1997. Included in cost
of sales for the twelve months ended December 31, 1997 is a provision of
approximately $104,000 for writing down Antizol-Vet inventories to market. Cost
of sales as a percentage of sales will fluctuate from quarter to quarter and
from year to year depending on, among other factors, demand for the Company's
products, new product introductions and the mix of approved products shipped.
Research and development expenses increased from $6,248,381 (74% of the total
loss from operations) for the twelve months ended December 31, 1996 to
$6,482,004 (54% of the total loss from operations) for the twelve months ended
December 31, 1997. The $233,623 increase, net of grant proceeds, is largely
attributable to significantly higher clinical trial program spending for
Busulfex and Xyrem, which was offset in part by reduced development spending on
the nine products the Company has determined it will phase-out over the next
twelve months. The Company recorded a one-time charge of $780,000 to earnings
during its third quarter ended September 30, 1997 with respect to its decision
to phase-out nine development products. The Company filed one NDA during 1997
for Sucraid compared to one NDA during 1996 for Antizol. As of December 31,
1997, the Company had three products under development, whereas thirteen
products were under development as of December 31, 1996. Research and
development expenditures will likely continue to fluctuate from quarter to
quarter and from year to year depending principally on, among other factors, the
timing of new product development and the progress of clinical trial programs.
However, based on the Company's current development portfolio of products that
it expects to market, research and development expenses are expected to decrease
in subsequent periods, but the amount of such decrease in subsequent periods
will depend principally on the level of Busulfex and Xyrem clinical trial
activity. The Company's clinical spending for a product is dependent on a number
of factors, including among others: the number of human subjects required for a
trial, the number of human subjects screened and enrolled in a trial and the
number of active clinical sites. In addition, the Company's product development
schedule for the products currently under development and additional products it
may develop in the future will also be influenced by regulatory decisions,
competitive pressures and the availability of funding.
Sales and marketing expenses increased from $399,444 (5% of the total loss from
operations) for the twelve months ended December 31, 1996 to $3,330,988 (28% of
the total loss from operations) for the twelve months ended December 31, 1997.
The $2,931,544 increase is principally due to a one-time $2,172,000 expense
related to the June termination of an agreement under which Chronimed had
exclusive rights to distribute certain Orphan Medical products. Without this
one-time $2,172,000 expense, sales and marketing expense increased approximately
$759,000 because of costs related to initiating the new distribution agreement
with Cardinal Health and marketing costs for the Company's four approved
products. Excluding one-time expenses, sales and marketing expenses are expected
to increase in subsequent quarters principally due to sales and marketing
programs associated with the Company's four approved products and due to the
addition of a small, specialized sales force for Antizol in the fourth quarter
of 1997.
General and administrative expenses increased from $1,854,273 (22% of the total
loss from operations) for the twelve months ended December 31, 1996 to
$2,461,344 (21% of the total loss from operations) for the twelve months ended
December 31, 1997. The $607,071 increase is principally due to the full year
effect of 1996 staff additions, lease costs for added office and storage space,
and information systems expenditures. General and administrative expenses are
not expected to increase in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased from $858,679
for the twelve months ended December 31, 1996 to $549,356 for the twelve months
ended December 31, 1997. This decrease is due to less interest income resulting
from lower levels of investable funds and interest expense incurred in the
second half of the year related to the Company's obligation to Chronimed. Other
income is expected to decline in subsequent quarters as currently invested funds
are used to fund
<PAGE>
development, marketing and sales activities, and as the Company accrues a
non-cash charge for interest expense related to the Chronimed obligation.
Net loss for the twelve months ended December 31, 1997 and for the twelve months
ended December 31, 1996 was $(11,387,869) and $(7,617,184), respectively. Basic
and diluted loss per common share for these respective periods were $(1.87) and
$(1.43), based on weighted average number of common shares outstanding of
6,074,342 and 5,331,356, respectively.
TWELVE MONTHS ENDED DECEMBER 31, 1996 (AUDITED) VS. TWELVE MONTHS ENDED DECEMBER
31, 1995 (UNAUDITED)
The Company commenced shipping Elliotts B Solution and Cystadane for the first
time in December 1996, whereas it had no sales in 1995. Sales were $36,681 for
the twelve months ended December 31, 1996.
Cost of sales increased from zero for the twelve months ended December 31, 1995
to $10,446 for the twelve months ended December 31, 1996.
Research and development expenses increased from $4,100,502 (73% of the total
loss from operations) for the twelve months ended December 31, 1995 to
$6,248,381 (74% of the total loss from operations) for the twelve months ended
December 31, 1996. The $2,147,879 increase, net of grant proceeds, is largely
attributable to higher levels of outside development expenditures, principally
clinical trial programs, toxicology and drug manufacturing costs, for Caprogel,
Xyrem and Sucraid, and development spending that commenced in 1996 on four new
products and one additional indication of a Current Product. The Company filed
one NDA for Antizol and a 510(k) application for Repliderm during 1996, whereas
the Company filed three NDAs (Cystadane, Elliotts B Solution and Antizol-Vet)
during 1995. As of December 31, 1996, the Company had thirteen products under
development, whereas twelve products were under development as of December 31,
1995.
Sales and marketing expenses increased from $0 for the twelve months ended
December 31, 1995 to $399,444 (5% of the total loss from operations) for the
twelve months ended December 31, 1996. Sales and marketing expenses prior to
1996 were included in general and administrative expenses and are not considered
material by the Company. The $399,444 increase is principally due to adding
marketing staff and sales and marketing costs for the commercial introduction of
the Company's first FDA approved products.
General and administrative expenses increased from $1,496,113 (27% of the total
loss from operations) for the twelve months ended December 31, 1995 to
$1,854,273 (22% of the total loss from operations) for the twelve months ended
December 31, 1996. The $358,160 increase is principally due to adding staff.
Other income increased from $438,668 for the twelve months ended December 31,
1995 to $858,679 for the twelve months ended December 31, 1996. This increase is
due solely to interest income attributable to higher levels of investable funds,
which resulted from the Company's secondary offering of Common Stock in April
1996.
Net loss for the twelve months ended December 31, 1996 and for the twelve months
ended December 31, 1995 was $(7,617,184) and $(5,157,947), respectively. Basic
and diluted loss per common share for these respective periods were $(1.43) and
$(1.89), based on weighted average number of common shares outstanding of
5,331,356 and 2,734,680, respectively.
SIX MONTHS ENDED DECEMBER 31, 1995 (AUDITED) VS. SIX MONTHS ENDED DECEMBER 30,
1994 (UNAUDITED)
Research and development expenses increased from $727,404 (59% of the total loss
from operations) for the six months ended December 30, 1994 to $2,414,988 (73%
of the total loss from operations) for the six months ended December 31, 1995.
The $1,687,584 increase is largely attributable to outside development
expenditures, principally clinical programs, toxicology and drug manufacturing
costs for Caprogel, Antizol, Cystadane, Busulfex and Xyrem. This increase
reflects increased spending for several products for which the Company has filed
NDAs and for which it expects to file NDAs in 1996. The Company filed three NDAs
(Cystadane, Elliotts B Solution and Antizol-Vet) during the six months ended
December 31, 1995, whereas no NDAs were filed during the six months
<PAGE>
ended December 30, 1994. As of December 31, 1995, the Company had twelve
products under development, whereas ten products were under development as of
December 30, 1994.
General and administrative expenses increased from $510,556 (41% of the total
loss from operations) for the six months ended December 30, 1994 to $872,773
(27% of the total loss from operations) for the six months ended December 31,
1995. The $362,217 increase is principally due to adding staff and a bonus
arrangement.
Other income increased from $96,752 for the six months ended December 30, 1994
to $289,611 for the six months ended December 31, 1995. This increase is due
solely to interest income attributable to higher levels of investable funds,
which resulted from the Company's public offering of Common Stock in May 1995.
Net loss for the six months ended December 31, 1995 and for the six months ended
December 30, 1994 was $(2,998,150) and $(1,141,208), respectively. Basic and
diluted loss per common share for these respective periods were $(.80) and
$(.96), based on weighted average number of common shares outstanding of
3,739,588 and 1,184,712, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1997, the Company has used $24,227,882 to
fund operating activities. Since July 2, 1994, the effective date the Company
was spun-off from Chronimed, it has financed its operations principally from
initial working capital balances, the net proceeds from the 1995 and 1996 public
offerings, interest income and product sales. The 1995 and 1996 public offerings
resulted in aggregate net proceeds, after commissions and expenses, of
$23,636,666.
Net working capital (current assets less current liabilities) decreased from
$14,538,893 at December 31, 1996 to $4,479,714 at December 31, 1997. Cash and
cash equivalents, and available-for-sale securities decreased from $16,707,906
at December 31, 1996 to $7,169,230 at December 31, 1997. The Company invests
excess cash in short-term, interest-bearing, investment grade securities.
The Company's commitments for outside development spending decreased from
$4,287,000 at December 31, 1996 to $2,700,000 at December 31, 1997. The
$1,587,000 decrease resulted principally from the Company's decision to phase
out nine products from its development portfolio. The Company expects future
commitments for Xyrem to increase significantly over current levels.
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through December 31, 1997 of $26,196,538.
These conditions give rise to the question about the Company's ability to
generate positive cash flow and fund operations. The Company believes that its
current working capital and anticipated operating cash flows will be sufficient
to fund its operations through December 31, 1998. These assumptions are based
upon the Company maintaining expenses at current levels and increasing revenues
from the sale of its Antizol product. Any material reduction in projected
revenues will require the Company to seek additional equity or debt financing or
substantially reduce the Company's expense structure through certain reductions
in personnel and research and development. There is no assurance that equity or
debt financing will be available or, if available, on acceptable terms. The
Company believes that, if necessary, it will be able to continue to meet its
ongoing financial obligations and operate through December 31, 1998 solely by
reducing its current expense level through reductions in personnel and research
and development.
The Company estimates it will need to raise at least $7,000,000 of additional
capital to fully implement the Company's current business plan through 1999. The
Company has no assurance that such capital will be available or, if available,
on acceptable terms.
The Company's ability to raise additional capital and/or raise capital on
acceptable terms could be negatively affected in the event it no longer meets
the Nasdaq's requirements for continued listing on the National Market tier. For
continued listing on the Nasdaq National Market, a company must satisfy a number
of requirements, which in the Company's case includes either: (1) net tangible
assets in excess of $4.0 million or (2) a market capitalization of
<PAGE>
at least $50.0 million. The Company's net tangible assets at December 31, 1997
equaled approximately $3,645,000. Net tangible assets means total assets less
total liabilities. Accordingly, upon receiving notice from Nasdaq regarding this
deficiency, the Company must either raise additional capital in order to satisfy
the $4.0 million net tangible asset requirement or maintain a market
capitalization of at least $50.0 million. Should the Company fail to satisfy
either requirement, the Company's Common Stock would no longer qualify for
listing on the Nasdaq National Market, but would qualify for quotation on the
Nasdaq Small Cap Market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements of the Company as of and for the year ended December
31, 1997 begin on page F-1 of this Annual Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE REGISTRANT.
The information required by this item is incorporated by reference from the
information under the caption "Election of Directors" contained in the Company's
Proxy Statement filed with the Securities and Exchange Commission in connection
with the solicitation of proxies for the Company's Annual Meeting of
Shareholders to be held on May 27, 1998 (the "Proxy Statement").
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Executive Officers of the Company is included in this
Annual Report in Item 4A under the caption "Executive Officers of the
Registrant".
(c) COMPLIANCE WITH 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
The information required by this item is incorporated by reference from the
information under the caption "Section 16(a) Reporting" contained in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
PAGE NUMBER
IN THIS
ANNUAL REPORT
DESCRIPTION
- ---------------------------------------------------------- -------------
Report of Independent Auditors F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Cash Flows F-4
Statement of Changes in Shareholders' Equity F-5
Notes to Financial Statements F-6 to F-11
(a) (2) All financial statement schedules normally required under Regulation S-X
are omitted as the required information is inapplicable.
(a) (3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Method of
Number Description Filing
- --------- -------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of Orphan Medical, Inc. ("OMI") (1)
3.2 Bylaws of OMI, as amended (1)
4.1 OMI 1994 Stock Option Plan (1)
4.2 OMI Employee Incentive Stock Option Agreement (1)
4.3 OMI Non-Incentive Stock Option Agreement (1)
4.4 OMI Non-Incentive Stock Option Agreement for Non-Employee Directors (1)
10.1 Marketing and Distribution Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.2 Transfer Agreement between OMI and Chronimed effective July 1, 1994 (1)
10.3 Distribution and Spin-off Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.4 Administrative Services Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.5 Security Agreement between OMI and Chronimed effective July 2, 1994 (1)
10.6 Aminocaproic Acid License Agreement between Chronimed and Virginia's Center for
Innovative Technology dated September 17, 1993 (1)
10.7 Patent and Technology License Agreement for Busulfan between Chronimed and The University
of Texas M.D., Anderson Cancer Center, the Board of Regents of the University of Texas
System and the University of Houston effective February 14, 1994 (1)
10.8 Letter Agreement regarding L-Cycloserine between Chronimed and Dr. Meier Lev dated
December 29, 1993 (1)
10.9 Sublicense Agreement regarding 4-Methylpyrazole between Chronimed and Mericon Investment
Group, Inc. dated December 17, 1993 (1)
10.10 License Agreement regarding Short Chain Fatty Acids between Chronimed and Richard Breuer
dated March 2, 1994 (1)
10.11 Employment Agreement between OMI and John Howell Bullion dated August 31, 1994 (1)
10.12 Employment Agreement between OMI and Bertram A. Spilker, Ph.D., M.D. dated August 31, 1994 (1)
10.13 Assumption Agreement and Consent to Assignments regarding Short Chain Fatty Acids between
OMI and Richard Breuer dated September 30, 1994 (2)
10.14 Assumption Agreement and Consent to Assignment regarding Aminocaproic
Acid between OMI and Virginia's Center for Innovative Technology
dated September 30, 1994 (2)
10.15 Assumption Agreement and Consent to Assignment regarding 4-Methylpyrazole between OMI and
Mericon Investment Group, Inc. dated October 5, 1994 (2)
<PAGE>
Exhibit Method of
Number Description Filing
- --------- -------------------------------------------------------------------------------------------- ---------
10.16 License Agreement regarding 4-Methylpyrazole between Kenneth McMartin and Mericon
Investment Group, Inc. dated July 6, 1993 (2)
10.17 License Agreement regarding Glucaric Acid between OMI and Ohio State University Research
Foundation dated December 28, 1994 (2)
10.18 Manufacturing Development and Supply Agreement regarding Aminocaproic Acid between OMI
and Lifecore Biomedical, Inc. dated December 21, 1994 (2)
10.19 Marketing Agreement regarding Cystagon between OMI and Chronimed dated October 19, 1994 (2)
10.20 Assumption Agreement and Consent to Assignment regarding Busulfan between OMI and the
University of Texas, M.D., Anderson Cancer Center, the Board of Regents of the University
of Texas System and the University of Houston dated October 18, 1994 (2)
10.21 License Agreement regarding Catrix between OMI and Lescarden, Inc. dated October 28, 1994 (2)
10.22 License Agreement regarding Sucrase between OMI and Hartford Hospital dated December 30,
1994 (2)
10.23 Option to Acquire License regarding Tretinoin between OMI and James Hannan dated February
6, 1995 (2)
10.24 Consulting Agreement between OMI and William B. Adams dated November 15, 1994 (3)
10.25 Lease Agreement between OMI and Wahldick Rice Property Management, Inc. ("Wahldick")
dated January 5, 1995 (2)
10.26 Lease Agreement between OMI and Wahldick dated October 3, 1994 (2)
10.27 Agreement regarding Cystagon between Chronimed and Mylan Pharmaceutical dated October 17,
1994 (2)
10.28 Lease Agreement between OMI and Wahldick dated May 26, 1995 (4)
10.29 Agreement between OMI and David A. Feste effective July 1, 1995 (4)
10.30 Development and License Agreement regarding Choline Chloride between OMI and Alan
Buchman, Donald J. Jenden, Marvin E. Ament and Mark D. Dubin dated May 11, 1995 (4)
10.31 Addendum to License Agreement regarding Short Chain Fatty Acids between OMI and Richard
Breuer dated May 12, 1995 (4)
10.32 Addendum to Administrative Services Agreement between OMI and Chronimed dated August 2,
1995 (4)
10.33 Amendment to Aminocaproic Acid License Agreement between OMI and Virginia's Center for
Innovative Technology dated September 17, 1993 (5)
10.34 Amendment No. 1 to Marketing and Distribution Agreement between OMI and Chronimed dated
July 2, 1994 (5)
10.35 Amendment to Marketing Agreement regarding Cystagon between OMI and Chronimed dated
October 19, 1994 (5)
10.36 IRS tax qualification letter dated January 10, 1996 regarding the favorable determination
of the tax status of the OMI 401(k) Savings Plan (5)
10.37 Lease Agreement between OMI and Wahldick Rice Property Management, Inc. dated February 5,
1996 (5)
10.38 Form of License Agreement regarding Colloidal Bismuth Subcitrate between OMI and Josman
Laboratories, Inc. dated March 4, 1996 (5)
10.39 Agreement between OMI and Chronimed dated June 3, 1996 to amend Marketing and
Distribution Agreement dated July 2, 1996 (6)
10.40 Cystadane Agreement between the OMI and Chronimed dated October 11, 1996 (7)
10.41 License Agreement regarding alpha galactosidase A between OMI and Research Corporation
Technologies, Inc. Dated March 15, 1996 (8)
10.42 License Agreement regarding 5-fluorouracil between OMI and the University of Miami and
its Department of Opthalmology dated December 6, 1996 (8)
<PAGE>
Exhibit Method of
Number Description Filing
- --------- -------------------------------------------------------------------------------------------- ---------
10.43 Collaborative Development Agreement regarding Clonidine between OMI and Medtronic, Inc.
dated November 27, 1996 (8)
10.44 Distribution Agreement between OMI and W. A. Butler Company dated November 26, 1996 (8)
10.45 Distribution Services Agreement between OMI and Cardinal Health dated June 1, 1997 (9)
10.46 Termination Agreement dated as of June 27, 1997 Filed
herewith
23.1 Consent of Ernst & Young LLP Filed
herewith
24 Power of Attorney Filed
herewith
27 Financial Data Schedule - EDGAR SCHEDULE Filed
herewith
99 Cautionary Statements Filed
herewith
</TABLE>
(1) Incorporated by reference to the corresponding exhibit numbers in OMI's
Registration Statement on Form 10 filed on August 31, 1994, Commission
File No. 0-24760.
(2) Incorporated by reference to the corresponding exhibit numbers in OMI's
Registration Statement on Form S-1 filed on March 3, 1995, Commission
File No. 0-24760.
(3) Incorporated by reference to the corresponding exhibit number in OMI's
Quarterly Report on Form 10-Q for the quarter ended December 30, 1994,
Commission File No. 0-24760.
(4) Incorporated by reference to the corresponding exhibit numbers in OMI's
Annual Report on Form 10-K filed for the year ended June 30, 1995,
Commission File No. 0-24760.
(5) Incorporated by reference to the corresponding exhibit numbers in OMI's
Registration Statement on Form S-1 filed on March 11, 1996, Commission
File No. 0-24760.
(6) Incorporated by reference to the corresponding exhibit number in OMI's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
Commission File No. 0-24760.
(7) Incorporated by reference to the corresponding exhibit number in OMI's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996,
Commission File No. 0-24760.
(8) Incorporated by reference to the corresponding exhibit numbers in OMI's
Annual Report on Form 10-K filed for the year ended December 31, 1996,
Commission File No. 0-24760.
(9) Incorporated by reference to the corresponding exhibit number in OMI's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997,
Commission File No. 0-24760.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of
Minnetonka, Minnesota, on the 27th day of March, 1998.
ORPHAN MEDICAL, INC.
By:
/s/ John Howell Bullion
-----------------------
John Howell Bullion
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934 this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated as of March 27, 1998.
SIGNATURE TITLE
- ------------------------------------------- ----------------------------------
/s/ John Howell Bullion Chief Executive Officer (Principal
- ------------------------------------------- Executive Officer) and a Director
John Howell Bullion
* Director
- -------------------------------------------
William A. Adams
* Director
- -------------------------------------------
Maurice R. Taylor, II
* Director
- -------------------------------------------
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.)
* Director
- -------------------------------------------
W. Leigh Thompson, Ph.D., M.D.
* Director
- -------------------------------------------
William M. Wardell, Ph.D., M.D.
- -------------------------------------------
By: /s/ John Howell Bullion
-----------------------
John Howell Bullion, Attorney-In-Fact
* John Howell Bullion, pursuant to the Powers of Attorney executed by
each of the officers and directors above whose name is marked by a "*",
by signing his name hereto, does hereby sign and execute this Annual
Report on behalf of each of the officers and directors in the
capacities in which the name of each appears above.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Orphan Medical, Inc.
We have audited the accompanying balance sheets of Orphan Medical, Inc. (a
development stage company) as of December 31, 1997 and 1996, the related
statements of operations, changes in shareholders' equity and cash flows for
each of the years ended December 31, 1997 and 1996, the six months ended
December 31, 1995 and the year ended June 30, 1995, and the period from January
1, 1993 (inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orphan Medical, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years ended December 31, 1997 and 1996, the six months ended
December 31, 1995, the year ended June 30, 1995, and the period from January 1,
1993 (inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 4, 1998
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,150,877 $ 3,927,945
Available-for-sale securities 5,018,353 12,779,961
Accounts receivable, less allowance for doubtful
accounts and returns of $22,600 and $0 238,356 36,679
Other receivables 143,581 114,506
Inventories 308,548 --
Prepaid expenses 41,599 35,070
------------ ------------
Total current assets 7,901,314 16,894,161
Property and equipment:
Property and equipment 494,680 336,991
Accumulated depreciation (157,044) (80,957)
------------ ------------
337,636 256,034
Organization costs, net of amortization -- 404
------------ ------------
Total assets $ 8,238,950 $ 17,150,599
============ ============
Liabilities and shareholders' equity
Current liabilities:
Chronimed, Inc. obligation - current portion $ 876,655
Accounts payable and accrued expenses 2,494,766 $ 2,297,736
Accrued payroll and related taxes 50,179 57,532
------------ ------------
Total current liabilities 3,421,600 2,355,268
Noncurrent liabilities
Chronimed, Inc. Obligation 1,171,448 --
Commitments
Shareholders' equity:
Common stock, $.01 par value; 25,000,000 shares
authorized; 6,099,562 and 6,056,088 issued and
outstanding 60,996 60,561
Additional paid-in capital 29,783,404 29,543,439
Deficit accumulated during the development stage (26,196,538) (14,808,669)
------------ ------------
3,647,862 14,795,331
Unrealized gain (loss) on available-for-sale
securities (1,960) --
------------ ------------
Total shareholders' equity 3,645,902 14,795,331
------------ ------------
Total liabilities and shareholders' equity $ 8,238,950 $ 17,150,599
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE YEAR JANUARY 1, 1993
ENDED ENDED MONTHS ENDED ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1995 1995 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 634,838 $ 36,681 $ -- $ - $ 671,519
Operating expenses:
Cost of sales 297,727 10,446 -- -- 308,173
Research and
development 6,482,004 6,248,381 2,414,988 2,412,918 18,205,416
Sales and marketing 3,330,988 399,444 -- -- 3,730,432
General and
administrative 2,461,344 1,854,273 872,773 1,133,896 6,567,491
------------ ------------ ------------ ------------ ------------
Loss from operations (11,937,225) (8,475,863) (3,287,761) (3,546,814) (28,139,993)
Other income:
Interest 549,356 858,679 289,611 245,809 1,943,455
------------ ------------ ------------ ------------ ------------
Net loss and deficit
accumulated during the
development stage $(11,387,869) $ (7,617,184) $ (2,998,150) $ (3,301,005) $(26,196,538)
============ ============ ============ ============ ============
Basic and diluted loss
per common share $ (1.87) $ (1.43) $ (0.80) $ (2.28) $ (7.92)
============ ============ ============ ============ ============
Weighted average number
of shares outstanding 6,074,342 5,331,356 3,739,588 1,447,452 3,303,980
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE YEAR JANUARY 1, 1993
ENDED ENDED MONTHS ENDED ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1996 1995 1995 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,387,869) $ (7,617,184) $ (2,998,150) $ (3,301,005) $(26,196,538)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 76,491 48,898 17,672 18,072 161,133
Loss on disposition of
fixed assets -- 4,091 -- -- 4,091
Changes in operating assets
and liabilities:
Accounts payable
and accrued
expenses 189,677 861,896 894,706 522,653 2,544,945
Inventories (308,548) -- -- -- (308,548)
Accounts
receivables and
current assets (237,281) (124,566) (5,156) (56,216) (432,965)
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (11,667,530) (6,826,865) (2,090,928) (2,816,496) (24,227,882)
INVESTING ACTIVITIES
Purchase of office
equipment (157,689) (132,991) (31,772) (151,525) (540,244)
Proceeds from fixed asset
sales -- -- -- 38,192 38,192
Purchase of short-term
investments (12,253,885) (19,523,044) (5,395,704) -- (37,172,633)
Maturities of short term
investments 20,013,533 10,462,638 1,676,149 -- 32,152,320
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) investing activities 7,601,959 (9,193,397) (3,751,327) (113,333) (5,522,365)
FINANCING ACTIVITIES
Capital contribution -- -- -- 5,000,000 5,000,000
Chromimed, Inc. obligation 2,048,103 -- -- -- 2,048,103
Stock option exercise
proceeds 240,400 83,625 -- -- 324,025
Net proceeds from stock
offerings -- 14,834,900 -- 8,801,766 23,636,666
Expenses paid by Chronimed -- -- -- -- 892,330
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities 2,288,503 14,918,525 -- 13,801,766 31,901,124
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents (1,777,068) (1,101,737) (5,842,255) 10,871,937 2,150,877
Cash and cash equivalents at
the beginning of period 3,927,945 5,029,682 10,871,937 -- --
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
the end of period $ 2,150,877 $ 3,927,945 $ 5,029,682 $ 10,871,937 $ 2,150,877
============ ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash interest received $ 730,618 $ 719,542 $ 261,562 $ 236,938 $ 1,948,657
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
---------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss for the period of
January 1, 1993 (inception)
to July 2, 1993 -- $ -- $ -- $ (43,668) $ (43,668)
Contribution by Chronimed -- -- 43,668 -- 43,668
------------ ------------ ------------ ------------ ------------
Balance at July 2, 1993 -- -- 43,668 (43,668) --
Net loss -- -- -- (848,662) (848,662)
Issuance of Common Stock
in connection with
establishment of Company
and net assets
distributed to Company
in connection with
spin-off 1,187,750 11,878 5,828,163 -- 5,840,041
------------ ------------ ------------ ------------ ------------
Balance at July 1, 1994 1,187,750 11,878 5,871,831 (892,330) 4,991,379
Net loss -- -- -- (3,301,005) (3,301,005)
Adjustment related to
actual number of shares
distributed to
shareholders in
connection with spin-off (6,912) (70) 70 -- --
Proceeds from public
offering in May and June
of 2,558,750 shares at
$4.00 per share, net of
commissions and expenses
of $1,433,284 2,558,750 25,588 8,776,128 -- 8,801,716
Proceeds from issuance of
warrant agreement to
purchase 222,500 shares
at $5.20 per share -- -- 50 -- 50
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1995 3,739,588 37,396 14,648,079 (4,193,335) 10,492,140
Net loss -- -- -- (2,998,150) (2,998,150)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 3,739,588 37,396 14,648,079 (7,191,485) 7,493,990
Net loss -- -- -- (7,617,184) (7,617,184)
Proceeds from public
offering in April of
2,300,000 shares at
$7.125 per share, net of
commissions and expenses
of $1,552,600 2,300,000 23,000 14,811,900 -- 14,834,900
Options exercised 16,500 165 83,460 -- 83,625
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 6,056,088 60,561 29,543,439 (14,808,669) 14,795,331
Net loss -- -- -- (11,387,869) (11,387,869)
Options exercised 41,287 413 213,284 -- 213,697
Compensatory options
granted -- -- 26,703 -- 26,703
Warrants exercised 2,187 22 (22) -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 6,099,562 $ 60,996 $ 29,783,404 $(26,196,538) $ 3,647,862
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS ACTIVITY
Orphan Medical, Inc. (the "Company"), a development stage company, acquires,
develops and markets products of high medical value intended to address
inadequately treated or uncommon diseases. A drug has high medical value if it
offers a major improvement in the safety or efficacy of patient treatment and
has no substantially equivalent substitute. The Company is the successor to the
business previously conducted by the Orphan Medical Division of Chronimed Inc.
("Chronimed") from January 1, 1993 (inception) to July 1, 1994. In July 1994,
Chronimed contributed the assets and personnel of its Orphan Medical Division,
together with the rights to several proposed pharmaceutical products, to the
Company. In October 1994, Chronimed distributed the shares of the Company's
Common Stock to the shareholders of Chronimed.
In the later half of 1997, the Company focused its efforts on drugs with high
medical value that fit within three specific therapeutic market segments:
antidote, oncology support, and sleep disorders. The Company is currently
developing three potential products and has four marketed products. The Company
received marketing clearance from the Food and Drug Administration ("FDA") to
market one product in 1997 and three products in 1996. In addition, a new drug
application ("NDA") was submitted in May 1997, which the Company expects will
receive marketing clearance from the FDA during the first half of 1998.
2. MANAGEMENT'S PLANS CONCERNING CASH FLOW AND ONGOING OPERATIONS
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through December 31, 1997 of $26,196,538.
These conditions give rise to the question about the Company's ability to
generate positive cash flow and fund operations. The Company believes that its
current working capital and anticipated operating cash flows will be sufficient
to fund its operations through December 31, 1998. These assumptions are based
upon the Company maintaining expenses at current levels and increasing revenues
from the sale of its Antizol product. Any material reduction in projected
revenues will require the Company to seek additional equity or debt financing or
substantially reduce the Company's expense structure through certain reductions
in personnel and research and development. There is no assurance that equity or
debt financing will be available or, if available, on acceptable terms. The
Company believes that, if necessary, it will be able to continue to meet its
ongoing financial obligations and operate through December 31, 1998 solely by
reducing its current expense level through reductions in personnel and research
and development.
The Company estimates it will need to raise at least $7,000,000 of additional
capital to fully implement the Company's current business plan through 1999. The
Company has no assurance that such capital will be available or, if available,
on acceptable terms.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FISCAL YEAR
In 1995, the Company changed its fiscal year ending June 30 to a calendar year
ending December 31. This change resulted in a shortened fiscal year of six
months, July 1, 1995 to December 31, 1995.
REVENUE RECOGNITION
Sales are recognized at the time a product is shipped to the Company's
customers, with provisions established for estimated outdated product returns.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of 90 days or less when purchased to be cash equivalents.
Cash equivalents are carried at cost plus accrued interest, which approximates
market value.
AVAILABLE-FOR-SALE SECURITIES
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of more than 90 days, but less than one year, when
purchased to be available-for-sale securities. Available-for-sale securities are
carried at cost plus accrued interest, which approximates market value. The
Company records unrealized gain or loss, if any, on available-for-sale
securities to a separate component of shareholders' equity.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.
INVENTORIES
Inventories are valued at standard costs that approximate actual costs computed
on a first-in, first-out basis, not in excess of market values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred. Depreciation is computed using the straight-line method over the
assets' estimated useful lives of five to seven years.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over a five-year
period.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
STOCK BASED COMPENSATION
The Company accounts for its stock option plans under the intrinsic-value-based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company has adopted the disclosure only provision of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123), beginning with the year ended December 31, 1996.
LOSS PER SHARE
Loss per share is based upon the weighted average number of shares outstanding
during the respective period. Common stock equivalents are not included as their
effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Under
SFAS 128, the definition and calculation of "Primary" and "Fully Diluted"
earnings per share prescribed by APB Opinion No. 15, "Earnings per Share", has
been revised with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options and
warrants. Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to SFAS 128.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified in order to conform with the
current year presentation. These reclassifications have no impact on net loss or
shareholders' equity as previously reported.
4. OPERATING LEASES
The Company has a non-cancelable operating lease for office space that expires
on December 31, 1998. Future minimum lease payments, including current real
estate taxes and operating expenses under this operating lease are $114,730.
Total rent expense was approximately $107,000, $66,000, $27,000 and $47,000 for
the years ended December 31, 1997 and 1996, the six month period ended December
31, 1995, and for the year ended June 30, 1995, respectively. The Company had no
rent expense prior to July 2, 1994.
5. INCOME TAXES
The Company has incurred net operating losses since inception. Losses through
July 1, 1994, the effective date of the spin-off, were utilized by Chronimed in
its consolidated income tax return. As of December 31, 1997, the Company had net
operating loss (NOL) carryforwards of approximately $22,534,000 and research and
experimentation tax credit carryforwards of approximately $1,834,000, which will
be available to reduce its future tax liabilities through the year 2012. For
financial reporting purposes, a valuation allowance of $10,323,000 has been
recognized to offset the deferred tax assets related to these carryforwards.
No current income taxes have been provided for the years ended December 31, 1997
and 1996, the six month period ended December 31, 1995, nor for the years ended
June 30, 1995 and July 1, 1994, as the Company had a loss for both financial
reporting and tax purposes.
Significant components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,661,000 $ 4,593,000
Research and experimentation credit carryforwards 1,834,000 1,008,000
Sales & marketing charge on terminating marketing agreement 696,000 --
Provision for project termination and other accrual 177,000 130,000
------------ ------------
10,368,000 5,731,000
Total deferred tax liabilities:
Depreciation (45,000) (22,000)
Valuation allowance for deferred tax assets (10,323,000) (5,709,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
In May 1995, the Company exceeded the limits allowable under Section 382 of the
Internal Revenue Code related to changes in ownership percentage governing
future utilization of NOL and research and experimentation tax credit
carryforwards (tax benefit carryforwards). The effect of this occurrence is to
limit the annual utilization of tax benefit carryforwards. As of December 31,
1997, approximately $1,259,000 of tax benefit carryforwards will be limited to
either approximately $339,000 per year pre-tax for the NOL carryforward, or
approximately $115,000 per year for the research and experimentation tax credit
carryforward.
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS
The Company has one stock option plan, the 1994 Stock Option Plan (the "Plan").
In 1995, shareholders approved the Plan, pursuant to which 1,250,000 shares of
Common Stock were reserved for issuance under the terms of the Plan. In
addition, in 1997, shareholders approved an amendment to the Plan, pursuant to
which an additional 300,000 shares of Common Stock were reserved for issuance
under the terms of the Plan. The Plan provides that the Board of Directors may
grant employee incentive stock options and non-qualified stock options at a
price of not less than 100% of fair market value. Options are exercisable as
prescribed by the Plan and expire up to fifteen years from the grant date for
non-qualified stock options and up to ten years from the grant date for employee
incentive stock options.
Options outstanding were granted as follows:
PLAN
SHARES AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------- --------- --------------
Balance at July 1, 1994 -- --
Reserved - August 1994 1,250,000 --
Options granted (1,044,500) 1,044,500 $5.00
---------- ---------
Balance at June 30, 1995 205,500 1,044,500
Options granted (189,500) 189,500 5.81
---------- ---------
Balance at December 31, 1995 16,000 1,234,000
Options granted (36,500) 36,500 8.06
Options canceled 46,000 (46,000) 5.23
Options exercised -- (16,500) 5.07
Reserved - December 1996 300,000 --
---------- ---------
Balance at December 31, 1996 325,500 1,208,000
Options granted (308,000) 308,000 5.81
Options canceled 78,566 (78,566) 5.19
Options exercised -- (41,287) 5.18
---------- ---------
Balance at December 31, 1997 96,066 1,396,147 $5.32
========== =========
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ------------------ ----------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$4.19 - $5.00 1,016,447 6.67 years $4.99 822,547 $4.99
$5.38 - $6.63 306,600 8.54 years 5.92 37,600 6.13
$6.83 - $10.13 73,100 6.73 years 7.66 43,800 7.57
------------------ ------------
$4.19 - $10.13 1,396,147 $5.31 903,947 $5.16
================== ============
</TABLE>
PRO FORMA INFORMATION:
The Company applies the intrinsic-value-based method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in
accounting for stock issued to employees, directors, and consultants.
Accordingly, compensation expense is recognized only when options are granted
with a discounted exercise price. Any such compensation expense is recognized
ratably over the associated service period, which is generally the option
vesting period.
Pro forma net loss and loss per share information, as required by of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123), has been determined as if the Company had
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
accounted for employee stock options under the fair value method. The fair value
of these options was estimated at grant date using a Black-Scholes option
pricing model with the following assumptions for 1997 and 1996, respectively :
risk-free interest rate of 5.5 percent; no dividend; expected option life of 5
years; and volatility of 61 percent.
PRO FORMA INFORMATION:
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over a four year average vesting period of the options.
The Company's pro forma net loss for 1997 and 1996 were $(11,689,025) and
$(7,846,467), and pro forma net loss per share were $(1.92) and $(1.47),
respectively. These pro forma amounts include amortized fair values attributable
to options granted after June 30, 1995 only, and therefore are not
representative of future pro forma amounts.
7. STOCK WARRANTS
The Company issued warrants to the underwriter related to the Company's 1995
initial public stock offering to purchase 222,500 shares of Common Stock at a
price of $5.20 per share. These warrants are exercisable at any time between May
11, 1997 and May 12, 2000. At December 31, 1997, the Company had warrants
outstanding to purchase 213,255 shares of Common Stock, all of which are
currently exercisable.
8. SHAREHOLDERS' EQUITY
On October 12, 1994, Chronimed Inc. distributed 1,180,838 shares of the
Company's Common Stock to its shareholders of record as of September 6, 1994.
The distribution of the Company's Common Stock by Chronimed Inc. represented a
complete distribution in connection with a spin-off of the Company, effective
July 1, 1994. The Company completed a public offering of Common Stock on May 19,
1995, and June 29, 1995, pursuant to which it sold 2,558,750 shares of Common
Stock at $4.00 per share, before commissions and expenses. The Company completed
a secondary public offering of Common Stock on April 23, 1996 pursuant to which
it sold 2,300,000 shares of Common Stock at $7.125 per share, before commissions
and expenses.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan which is funded by elective salary
deferrals by employees. The Plan covers substantially all employees meeting
minimum eligibility requirements. The Plan does not require mandatory
contributions by the Company, but discretionary contributions may be made at the
election of the Company. The Company has not made any provision for
discretionary contributions to the Plan.
10. COMMITMENTS
CONSULTING, LICENSE AND TECHNICAL SERVICE AGREEMENTS: The Company has various
commitments under agreements with outside consultants, contract drug development
and manufacturers, technical service companies, license and research agreements,
and agreements with drug distributors. The fees paid or accrued under these
agreements with contract drug development and technical service companies
totaled approximately $5,232,000 for the year ended December 31, 1997,
$5,242,000 for the year ended December 31, 1996, $1,826,000 for the six month
period ended December 31, 1995 and $1,040,000 for twelve month period ended June
30, 1995. The Company's commitment to incur additional expenditures in
subsequent periods for development activities decreased from $4,287,000 at
December 31, 1996 to $2,700,000 at December 31, 1997. Commitments for
development expenditures will likely fluctuate from year to year depending on,
among other factors, the timing of new product development, if any, and clinical
trial activity.
CHRONIMED: The Company and Chronimed entered into an Agreement dated June 27,
1997, in which Chronimed agreed to terminate certain agreements that had been in
existence since the spin-off of the Company from Chronimed. Among the terminated
agreements was the Marketing and Distribution Agreement dated July 2, 1994, as
amended, under which Chronimed had the exclusive right to market and distribute
four of Orphan Medical's proposed products and receive royalties with respect to
two of Orphan Medical's current products. In consideration
<PAGE>
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS (CONTINUED)
for terminating these agreements, the Company agreed to pay Chronimed
compensation equal to $2,500,000, consisting of cash and shares of the Company's
Common Stock. Chronimed was paid $250,000 in cash on June 27, 1997, with the
remaining balance of $2,250,000 payable in quarterly installments based on a
temporary royalty arrangement equal to 3 percent of the Company's sales and the
issuance of Common Stock equal to 1 percent of the Company's issued and
outstanding Common Stock at each quarter end. For the year ended December 31,
1997, as provided by the Agreement, the Company paid Chronimed approximately
$9,400 in royalties. The issuance of Common Stock will commence with the
Company's quarter ended March 31, 1998. The quarterly installments of cash
royalty payments and the quarterly issuance of the Company's Common Stock will
continue until Chronimed has realized cumulative compensation, including the
$250,000 cash payment, valued at $2,500,000. With respect to this transaction,
the Company recorded a sales and marketing expense of approximately $2,172,000
for the quarter ended June 30, 1997.
The Company estimates that its unpaid obligation to Chronimed may take at least
12 to 24 months, if not longer, to fully satisfy. At December 31, 1997, the
Company's unpaid obligation to Chronimed has an estimated value of approximately
$2,048,103 based on its estimate of royalties payable in future periods and its
estimate of future values for the Company's Common Stock. Accordingly, based on
these estimates and amounts incurred for the year ended December 31, 1997, the
Company classified $876,655 as a "Current Liability" and $1,171,448 as a
"Noncurrent Liability".
11. RELATED PARTY TRANSACTIONS
Three directors of the Company are also directors of Chronimed. In addition, the
Chairman of the Board of Directors of the Company was Chairman of the Board of
Directors of Chronimed until June 1994. The Company paid approximately $27,900,
$22,000, $41,000 and $69,000 in director fees and reimbursed expenses to the
Company's three directors who are also directors of Chronimed for the years
ended December 31, 1997 and 1996, the six months ended December 31, 1995 and for
the fiscal year ended June 30, 1995, respectively. Employees of the Company
serving as directors are not compensated for their duties as directors.
12. CHANGE IN FISCAL YEAR
During 1995, the Company changed its fiscal year ending June 30 to a calendar
year ending December 31. The following comparative financial information for
calendar 1995 and the six months ended December 30, 1994 is unaudited. In the
opinion of the management of the Company, these financial results reflect all
adjustments, consisting only of normal and recurring adjustments, necessary for
a fair presentation:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
--------------- -------------------
Operating expenses:
Research and development $ 4,100,502 $ 727,404
General and administrative 1,496,113 510,556
--------------- -------------------
Loss from operations (5,596,615) (1,237,960)
Other income:
Interest 438,668 96,752
--------------- -------------------
Net loss $(5,157,947) $ (1,141,208)
=============== ===================
Net loss per common share $ (1.89) $ (.96)
=============== ===================
Weighted average number of
shares outstanding 2,734,680 1,184,712
=============== ===================
EXHIBIT 10.46
TERMINATION AGREEMENT
AGREEMENT, made and entered into as of the 27th day of June,
1997, by and between Orphan Medical, Inc., a Minnesota corporation ("Orphan"),
and Chronimed, Inc., a Minnesota corporation ("Chronimed").
WHEREAS, Orphan and Chronimed are parties to each of the
following agreements (collectively referred to as the "Agreements") which were
entered into by them in connection with, and at the time of, the dividend
distribution by Chronimed to its shareholders of all of the then outstanding
shares of Orphan's common stock:
i. Marketing and Distribution Agreement, dated as of
July 2, 1994, together with amendments thereto dated
December 22, 1995 and June 3, 1996 (dealing with
Antizol-Vet(TM) and Elliotts B(TM) Solution)
(collectively, the "Distribution Agreement");
ii. Security Agreement, dated as of July 2, 1994 (the
"Security Agreement"); and
iii. Services Agreement, dated as of July 2, 1994 (the
"Services Agreement")
WHEREAS, Orphan wishes to terminate the Distribution Agreement
and the other Agreements so that Orphan can assume full responsibility for the
distribution and sale of its products, other than Cystadane; and
WHEREAS, Chronimed is willing to terminate the Distribution
Agreement and the other Agreements on the terms and for the consideration set
forth in this agreement;
NOW THEREFORE, in consideration of the premises, the
respective commitments and undertakings of Chronimed and Orphan set forth in
this agreement, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Orphan and Chronimed hereby agree as
follows:
1. Termination of the Agreements. (a) Except as provided in
section 1(b), effective as of the date of this agreement (the "Termination
Date"), each of the Agreements shall be terminated and shall be of no continuing
force or effect, and the rights and obligations of Orphan and Chronimed under
each of the Agreements shall become null and void. The cystadane agreement,
dated October 11, 1996, between Orphan and Chronimed (the "Cystadane Agreement")
shall not be regarded as one of the Agreements and shall continue in full force
and effect after the Termination Date.
(b) The confidentiality provisions set forth in section 6.3 of
the Distribution Agreement shall remain in full force and effect from and after
the Termination Date.
(c) On or before the Termination Date, Chronimed shall execute
and deliver to Orphan such termination statements and other documents as shall
be reasonably necessary to terminate all security interests which were granted
to Chronimed under the Security Agreement to secure the performance of Orphan
under the Distribution Agreement.
2. Termination Payments. In full and final consideration for
Chronimed's agreement to terminate the Agreements, Orphan agrees to make
termination payments to Chronimed in the aggregate amount of $2,500,000, which
payments shall be made in the following manner:
(a) Orphan shall make a cash payment of $250,000 to Chronimed
on the Termination Date;
(b) On March 31, 1998 and on the last day of each three
(3)-month period thereafter, Orphan shall issue and deliver to Chronimed that
number of unregistered shares of Orphan's common stock (the "Shares") as shall
be equal to one percent (1%) of the total outstanding shares of Orphan common
stock immediately prior to the date of issuance of the Shares; provided,
however, that Orphan's obligation to issue Shares to Chronimed shall terminate
at such time as (i) the aggregate cash payments made, or owing to, Chronimed
pursuant to section 2(c), plus (ii) the net sales proceeds realized by Chronimed
from the sale of Shares sold by Chronimed (after payment of
<PAGE>
any brokerage commissions and fees, other costs of sale and Chronimed Expenses
(as defined in exhibit A) within ninety (90) days after the effective date for
the registration statement covering such Shares, plus (iii) the Market Value of
Shares issued to Chronimed pursuant to this section 2(b) which are not sold by
Chronimed within ninety (90) days after the effective date of any registration
statement covering such Shares, exceeds $2,250,000. For purposes of this section
2(b), the term "Market Value" means the average last bid price for shares of
Orphan common stock on the NASDAQ over-the-counter market for the last five (5)
market days in such ninety (90) day period.
(c) Orphan shall make additional cash payments (the
"Supplemental Payments") to Chronimed equal to three percent (3%) of the net
revenues (i.e. gross sales revenues less allowances, discounts, bad debts,
returns and customs and excise taxes) received by Orphan from the sale or
licensing of any of its products (other than Cystadane) subsequent to the
Termination Date; provided, however, that the aggregate amount of Supplemental
Payments shall not exceed (i) $2,250,000, less (ii) the amounts determined
pursuant to sections 2(b)(ii) and 2(b)(iii). Orphan shall make payment of
Supplemental Payments to Chronimed in quarterly installments within thirty (30)
days after the end of each calendar quarter (commencing for the quarter ending
September 30, 1997) based on net revenues received by Orphan in such calendar
quarter (with net revenues for the period from the Termination Date through June
30, 1997 being included in the first calendar quarter). Each such Supplemental
Payment shall be accompanied by a report which substantiates the net revenues
and the determination of the Supplemental Payment. Until such time as Chronimed
has received aggregate payments of $2,500,000 under this agreement, Chronimed
and its representatives may, upon reasonable request and at its expense, review
and copy records of Orphan pertaining to the determination of the Supplemental
Payments.
(d) Notwithstanding the foregoing, Orphan reserves the right,
at any time, to make a cash payment to Chronimed equal to the then unpaid
balance of the $2,500,000 termination payment amount. Upon delivery of such
payment to Chronimed, Orphan shall have no further payment obligations under
this section 2, and Chronimed shall endorse and deliver to Orphan, without
further consideration, any Shares then owned by Chronimed, other than Shares
described in section 2(b)(iii).
(e) In the event that shares of Orphan's common stock cease
being tradeable on a national or regional securities market for any reason, the
unpaid balance of the $2,500,000 termination amount shall be immediately due and
payable by Orphan or its successor to Chronimed in cash. Upon delivery of such
payment to Chronimed, Orphan shall have no further payment obligations under
this section 2, and Chronimed shall endorse and deliver to Orphan, without
further consideration, any Shares then owned by Chronimed, other than Shares
described in section 2(b)(iii).
3. Chronimed Commitments. Within ten (10) days after the sale
of any Shares by Chronimed, Chronimed shall deliver to Orphan a copy of a
broker's sale confirmation which evidences the net sales proceeds realized by
Chronimed. In the event that the aggregate amounts paid to, or realized by,
Chronimed, as determined pursuant to sections 2(a), 2(b)(ii), 2(b)(iii) or 2(c),
exceed $2,500,000, Chronimed shall refund such excess amount to Orphan, in cash,
within fifteen (15) days after such aggregate amount is first determinable.
4. Chronimed Representations. Chronimed represents and
warrants to Orphan as follows:
(a) The Shares being acquired by Chronimed pursuant to this
agreement are being acquired for Chronimed's own account and not with the view
to, or for resale in connection with, any distribution or public offering
thereof within the meaning of the federal Securities Act of 1933 (the
"Securities Act"). Chronimed understands that at the time of their issuance the
Shares will not be registered under the Securities Act by reason of their
contemplated issuance in transactions exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to section4(2)
thereof.
(b) This agreement has been duly authorized by the requisite
corporate action of Chronimed, has been duly executed and delivered by
Chronimed, and is a valid and binding obligation of Chronimed which is
enforceable against Chronimed in accordance with its terms.
<PAGE>
(c) Chronimed has reviewed all of Orphan's filings with the
Securities and Exchange Commission and has taken all actions that it has
determined to be appropriate or necessary to assess the merits and risks of an
investment in the Shares.
(d) Chronimed understands that each certificate representing
the Shares shall initially be endorsed with the following legend:
"The Shares represented by this certificate may not be
transferred without (i) the opinion of counsel satisfactory to
the issuer of such Shares that such transfer may lawfully be
made without registration or qualification under the federal
Securities Act of 1933, as amended, and applicable state
Shares laws; or (ii) such registration or qualification."
5. Representations of Orphan. Orphan represents and warrants
to Chronimed as follows:
(a) This agreement has been duly authorized by the requisite
corporate action of Orphan, has been duly executed and delivered by Orphan, and
is a valid and binding obligation of Orphan which is enforceable against Orphan
in accordance with its terms.
(b) As of the date of this agreement, there are 6,063,588
shares of Orphan's common stock issued and outstanding.
(c) When issued and delivered to Chronimed pursuant to this
agreement, the Shares shall be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of any liens or security interests.
(d) Orphan is currently qualified to register shares of its
capital stock on Form S-3, pursuant to the federal Securities Act of 1933 and
the applicable regulations promulgated thereunder, and until such time as
Chronimed receives the aggregate payments pursuant to this agreement of
$2,500,000, Orphan shall make such filings and shall take such other actions as
shall be necessary for Orphan to continue to qualify for the use of Form S-3.
(e) At the next regularly scheduled meeting of its Board of
Directors, Orphan shall reserve a sufficient number of shares of its authorized
common stock for issuance to Chronimed to satisfy its obligations under section
2(b) of this agreement.
6. Registration Rights. Orphan shall cause the Shares to be
registered for subsequent sale by Chronimed in the manner contemplated by
exhibit A to this agreement.
7. Mutual Release.
(a) Orphan, acting for itself, its insurers, its successors
and assigns, and each of them, does hereby release and forever discharge
Chronimed, its officers, employees, agents, consultants, successors and assigns,
and each of them, from any and all liabilities, claims, demands and causes of
action, either in law or in equity, known or unknown, liquidated or
unliquidated, which have arisen or may arise out of or are in any way connected
with any of the Agreements, on account of any act, omission, event, occurrence,
representation, warranty, failure, default or breach, actual or asserted, of
Chronimed, its officers, employees, agents, consultants, or any of them on or
prior to the date of this instrument; provided, however, that this release does
not affect the obligations or commitments of Chronimed under this agreement.
(b) Chronimed, acting for itself, its insurers, its successors
and assigns, and each of them, does hereby release and forever discharge Orphan
and its officers, employees, agents, consultants, successors and assigns, and
each of them, from any and all liabilities, claims, demands and causes of
action, either in law or in equity, known or unknown, liquidated or
unliquidated, which have arisen or may arise out of or are in any way connected
with any of the Agreements, on account of any act omission, occurrence,
representation, warranty, failure, default or breach, actual or asserted, of
Orphan and its officers, employees, agents or consultants, or any of
<PAGE>
them, on or prior to the date of this instrument; provided, however, that this
release does not affect (i) the obligations or commitments of Orphan under this
agreement, or (ii) the obligation of Orphan to make payment to Chronimed of any
royalties payable to Chronimed with respect to the sale of Antizol-Vet(TM) or
Elliots B(TM) products.
8. Miscellaneous.
(a) Binding Effect. This agreement shall be binding on, and
shall inure to the benefit of, Orphan and Chronimed and their respective
successors and assigns.
(b) Entire Agreement. This agreement evidences the complete
agreement and understanding between Orphan and Chronimed with respect to the
subject matter hereof and supersedes and preempts any prior understandings,
agreements or representation, by or between them, whether written or oral, which
related to the subject matter hereof in any way.
(c) Public Announcement. Any public announcement relative to
the matters set forth in this agreement shall be mutually acceptable to both
Orphan and Chronimed, and the parties agree to cooperate in coordinating the
timing and content of such announcement.
(d) Governing Law. This agreement shall be governed by and
interpreted in accordance with the internal law, not the law of conflicts, of
the state of Minnesota.
IN WITNESS WHEREOF, each of Orphan and Chronimed have caused
this agreement to be executed and delivered by a duly authorized representative
as of the date set forth in the first paragraph.
CHRONIMED, INC. ORPHANMEDICAL, INC.
By /s/ Norman A. Cocke By /s/ John Howell Bullion
-------------------- ------------------------
<PAGE>
EXHIBIT 10.46
EXHIBIT A
REGISTRATION RIGHTS PROVISIONS
1. Registration Commitment. As soon as reasonably practicable
after each issuance of Shares pursuant to this agreement, but not later than
thirty (30) days thereafter, Orphan shall prepare and file a registration
statement under the Securities Act covering such Shares on Form S-3 (or any
successor form subsequently promulgated by the Commission as a replacement for
Form) if such form is then available for use by Orphan.
2. Registration Procedures. In connection with the
registration of Shares under the Securities Act, Orphan will:
(a) prepare and file with the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act (the "Commission") a registration statement with respect
to such Shares, and use its best efforts to cause such registration
statement to become effective and to remain effective for such period
as may be reasonably necessary to effect the sale of such Shares, not
to exceed nine (9) months;
(b) prepare and file with the Commission such amendments to
such registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement
effective for such period as may be reasonably necessary to effect the
sale of such Shares, not to exceed nine (9) months;
(c) furnish to Chronimed and to the underwriters, if any, of
the Shares being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and
such other documents as such underwriters may reasonably request in
order to facilitate the public offering of such Shares;
(d) use its best efforts to register or qualify the Shares
covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as Chronimed may reasonably request
within twenty (20) days following the original filing of such
registration statement, except that Orphan shall not for any purpose be
required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified;
(e) notify Chronimed, promptly after it shall receive notice
thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(f) notify Chronimed promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) prepare and file with the Commission, promptly upon the
request of Chronimed, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel
for Chronimed (and concurred in by counsel for Orphan), is required
under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Shares by Chronimed;
(h) prepare and promptly file with the Commission and promptly
notify Chronimed of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to
such Shares is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or
any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
<PAGE>
(i) advise Chronimed, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement
or the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which Chronimed shall have reasonably
objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities
Act or the rules and regulations thereunder, after having been
furnished with a copy thereof at least five business days prior to the
filing thereof, unless in the opinion of counsel for Orphan the filing
of such amendment or supplement is reasonably necessary to protect
Orphan from any liabilities under any applicable federal or state law
and such filing will not violate applicable law; and
(k) at the request of Chronimed, furnish an opinion, dated the
closing date, of the counsel representing Orphan for the purposes of
such registration, addressed to the underwriters, if any, and to
Chronimed, covering such matters as such underwriters and Chronimed may
reasonably request.
3. Expenses. With respect to each inclusion of Shares in a
registration statement pursuant to section 1, Orphan shall bear the following
fees, costs and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for Orphan, all
legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the Shares to be
offered are to be registered or qualified. Fees and disbursements of counsel and
accountants for Chronimed, underwriting discounts and commissions and transfer
taxes for Chronimed and any other expenses incurred by Chronimed not expressly
included above shall be borne by Chronimed (collectively, "Chronimed Expenses").
4. Indemnification.
(a) Orphan will indemnify and hold harmless Chronimed and any
underwriter (as defined in the Securities Act) for Chronimed, and each
person, if any, who controls Chronimed or such underwriter within the
meaning of the Securities Act, from and against any and all loss,
damage, liability, cost and expense to which Chronimed or any such
underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
provided, however, that Orphan will not be liable in any such case to
the extent that any such loss, damage, liability, cost or expense
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with
written information furnished by Chronimed, such underwriter or such
controlling person specifically for use in the preparation thereof;
provided, however, that the foregoing indemnity, insofar as it relates
to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus but eliminated or remedied
in the prospectus shall not inure to the benefit of any underwriter (or
any employee, agent or affiliate of or any person controlling such
underwriter) with respect to any action or claim asserted by a person
who purchased any Shares from such underwriter unless such person was
sent or given a copy of the prospectus with or prior to the written
confirmation of the sale involved.
(b) Chronimed will indemnify and hold harmless Orphan, any
controlling person and any underwriter from and against any and all
loss, damage, liability, cost or expense to which Orphan or any
controlling person and/or any underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged
untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or
<PAGE>
any amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was so made in reliance upon and in strict conformity
with written information furnished by Chronimed specifically for use in
the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to
the provisions of paragraph (a) or (b) of this section of notice of the
commencement of any action involving the subject matter of the
foregoing indemnity provisions, such indemnified party will, if a claim
thereof is to be made against the indemnifying party pursuant to the
provisions of said paragraph (a) or (b), promptly notify the
indemnifying party of the commencement thereof; but the omission to so
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than hereunder. In
case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the
right to select separate counsel to participate in the defense of such
action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the
proviso of the preceding sentence, (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the
notice of the commencement of the action, or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party.
EXHIBIT 23.1
ORPHAN MEDICAL, INC.
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement No.
333-29487 and 333-3674 on Form S-8 of Orphan Medical, Inc. pertaining to the
Orphan Medical, Inc. 1994 Stock Option Plan of our report dated February 4,
1998, with respect to the financial statements of Orphan Medical, Inc. included
in its Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 26, 1998
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints John Howell Bullion , his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Orphan Medical, Inc. for
the twelve months ended December 31, 1997, and all amendments to such Annual
Report on Form 10-K and to file same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes he might or could do in person, hereby ratifying and confirming all
said attorneys-in-fact and agents or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Signature Date
--------- ----
/s/ John Howell Bullion January 19, 1998
- -----------------------
John Howell Bullion
Chief Executive Officer & Secretary
(Principal Executive Officer) and Director
/s/ William B. Adams January 15, 1998
- --------------------
William B. Adams
Chairman of the Board and Director
/s/ Maurice R. Taylor, III January 15, 1998
- --------------------------
Maurice R. Taylor, II
Director
/s/ W. Leigh Thompson January 18, 1998
- ---------------------
W. Leigh Thompson
Director
/s/ William M. Wardell January 21, 1998
- ----------------------
William M. Wardell
Director
/s/ Lawrence C. Weaver February 2, 1998
- ----------------------
Lawrence C. Weaver
Director
EXHIBIT 99
ORPHAN MEDICAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected. The Company desires to take advantage of these
"safe harbor" provisions and is filing this Exhibit 99 in order to do so.
Accordingly, when used in this Annual Report on Form 10-K and in future filings
by the Company with the Securities and Exchange Commission, quarterly reports,
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company hereby cautions readers that the following important
factors, among others, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any forward-looking statements made by or on behalf of the Company.
LACK OF REVENUES AND PROFITABLE OPERATIONS; UNCERTAINTY OF FUTURE FINANCIAL
RESULTS.
The Company has been unprofitable since its inception in January 1993 and had an
accumulated deficit of $26,196,538 as of December 31, 1997. From inception
through December 31, 1997, the Company reported Elliotts B Solution, Cystadane,
Antizol-Vet, and Antizol sales of $634,838 and gross profit on such sales of
$337,111, which the Company considers immaterial for purposes of funding future
product development or business growth. The Company expects operating losses to
continue into 1999 because gross profit from new product introductions is not
expected to offset additional spending required to complete the development
plans for Busulfex and Xyrem, and for additional sales and marketing spending
for the new product introductions. The amount of these losses may vary
significantly from year-to-year and quarter-to-quarter and will depend on, among
other factors, the timing of product development and regulatory approval. There
can be no assurance that the Company will ever generate material product
revenues or achieve profitability.
DEVELOPMENT STAGE COMPANY.
The Company is in the development stage and its operations and the development
of its proposed products are subject to all of the risks inherent in the
establishment of a new business enterprise, including reliance on key personnel,
the lack of fully-developed products, insufficient capital, a competitive
environment characterized by numerous well-established and well-capitalized
competitors, expected operating losses into 1999, a market subject to extensive
regulatory oversight, and reliance on outside contractors for the manufacture
and distribution of its proposed products. The likelihood of the success of the
Company must be considered in light of the problems, expenses and delays
frequently encountered in connection with the development of new pharmaceutical
products or medical products and the competitive and regulatory environment in
which the Company operates.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE.
The Company's current cash, cash equivalents, and short-term investments are
expected to be sufficient to fund the Company's operations into early 1999.
Thereafter, to fully implement the Company's current business plan through 1999,
the Company believes it will need to raise at least $7,000,000 of additional
capital, assuming no internally generated funding is available. Adequate funds
for the Company's operations, whether from financial markets or from other
sources, may not be available when needed on terms attractive to the Company, or
at all. Lack of funding could cause the Company to delay, scale back or
eliminate some or all of its products currently under development, including
acquisition and licensing programs, or prevent the commercial introduction of
some or all of its products altogether.
<PAGE>
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY.
The Company has adopted a license and acquisition strategy to build its product
portfolio. The Company's strategy for growth is dependent upon its continued
ability to identify and acquire new pharmaceutical products targeted at niche
markets within selected strategic therapeutic market segments ("STMS"). Because
the Company does not engage in proprietary research and development of new
pharmaceutical products, it must rely upon the willingness of others to sell or
license pharmaceutical product opportunities to the Company. Other companies,
including those with substantially greater resources, are competing with the
Company to acquire such products. There can be no assurance that the Company
will be able to acquire rights to additional products on acceptable terms, if at
all. The failure of the Company to acquire or license new pharmaceutical
products within a selected STMS or to promote and market commercially successful
products within an existing STMS could have a material adverse effect on the
Company's business and its prospects.
The Company has contractual production rights to certain compounds through
various license agreements. These agreements are generally terminable by the
licensor for cause upon short notice or in the event the Company is insolvent or
bankrupt, does not apply minimum resources and efforts to develop the compound
under license or does not achieve certain minimum royalty payments. There can be
no assurance that the agreements will not be so terminated and, if terminated,
that the Company will be able to enter into similar agreements on terms as
favorable to the Company as those contained in its existing license agreements.
FOREIGN MARKETING ALLIANCES; NO ASSURANCE OF FOREIGN LICENSEES.
The Company's strategy for the exploitation of foreign markets for its products
is to enter into marketing alliances with multinational and foreign
pharmaceutical companies. From inception through December 31, 1997, the Company
has entered into distribution agreements to sell Cystadane in Australia and New
Zealand, and Antizol in Europe. Sales of Cystadane for Australia and New Zealand
have not been nor are they expected to be material. Distribution of Antizol in
Europe will initially be done on a "named patient" or "emergency use" basis
until full regulatory approval is obtained, and the Company does not expect such
"emergency use" distribution to result in material sales. Distribution of
Antizol in Europe through normal or the usual distribution channels will not
commence until the product has received marketing approval in each European
country into which the distributor expects to sell the product. The Company
typically receives upfront fees for entering into such arrangements and expects
to realize future benefits because the Company will be the exclusive supplier of
the product sold to the distributor in these foreign markets. However, there can
be no assurance that the Company will be able to negotiate additional alliances
for its other products on acceptable terms, if at all, or that such alliances
will be successful. The Company will be substantially dependent upon the
companies it has contracted with to date for the successful distribution of
Cystadane and Antizol outside the U.S. and, if these companies are unsuccessful
in their distribution efforts, it would be difficult for the Company to contract
with other distributors for these products within the licensed territories.
GOVERNMENT REGULATION; NEED FOR FDA AND OTHER REGULATORY APPROVALS.
Government regulation in the United States and abroad will be a significant
factor in the production, testing and marketing of the Company's current and
future products. Prior to marketing, each of the Company's products must undergo
an extensive regulatory approval process conducted by the United States Food and
Drug Administration (the "FDA") and by comparable agencies in other countries.
The approval process can take many years and require the expenditure of
substantial resources, and there can be no assurance that any product that the
Company may develop will be approved by the FDA or any foreign regulatory
authority in a timely manner, or at all. Generally, only a very small percentage
of newly discovered pharmaceutical compounds that enter pre-clinical development
are approved for sale. The Company will not be permitted to market any medicine
it may develop as a prescription product in any jurisdiction in which the
product does not receive regulatory approval. Once approved, the Division of
Drug Marketing, Advertising and Communication ("DDMAC"), the FDA's marketing
surveillance department within the Center for Drugs, must approve marketing
claims, which are the basis for a product's labeling, advertising and promotion.
There can be no assurance that the claims the Company is seeking will be
approved by DDMAC. The failure to obtain acceptable marketing claims on a
product from DDMAC could have a material adverse effect on the Company and its
prospects.
<PAGE>
The Company depends on external laboratories and medical institutions to conduct
its pre-clinical and clinical testing in compliance with clinical and laboratory
practices established by the FDA. The data obtained from pre-clinical and
clinical testing are subject to varying interpretations that could delay, limit
or prevent regulatory approval. In addition, delays or rejection may be
encountered based upon changes in FDA policy for drug approval during the period
of development and by the requirements for regulatory review of each submitted
New Drug Application ("NDA"). Moreover, even if the FDA approves a product, such
approval may entail commercially unacceptable limitations on the uses, or
"indications," for which a product may be marketed, and further studies may be
required to provide additional data on safety or effectiveness. The FDA also
requires post-marketing adverse event surveillance programs to monitor the
product's side effects.
An approved FDA product and the product's manufacturer are subject to continual
regulatory review and the later discovery of previously unknown problems with a
product or manufacturer may result in restrictions or sanctions on such products
or manufacturer, including the withdrawal of such product from the market. Most
changes in the manufacturing procedures for any of the Company's approved
products and any change in manufacturers will require the approval of the FDA
prior to their implementation Obtaining the FDA's approval for a change in
manufacturing procedures or change in manufacturers could cause production
delays and loss of sales, which would have a material adverse effect the
Company's business and its prospects.
In certain countries, the sales price of a product must also be approved after
marketing approval is granted. No assurance can be given that satisfactory
prices can be obtained in foreign markets even if marketing approval is granted
by foreign regulatory authorities.
ORPHAN DRUG STATUS.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects populations of fewer than 200,000 people in the United
States. Orphan drug designation must be requested before submitting an NDA, and
after the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicized by the FDA. Under
current law, orphan drug status is conferred upon the first company to receive
FDA approval to market the designated drug for the designated indication, which
also grants United States marketing exclusivity for a period of seven years
following approval by the NDA, subject to certain limitations. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process. Moreover, although obtaining FDA approval to market
a product with orphan drug status can be advantageous, there can be no assurance
that the scope of protection or the level of marketing exclusivity that is
currently afforded by orphan drug status and marketing approval will remain in
effect in the future. Busulfex, Xyrem, and Sucraid have orphan drug designation;
while Antizol, Elliotts B Solution and Cystadane have orphan drug status. There
can be no assurance, however, that any product candidates will receive an orphan
drug designation or that any of the Company's products with such a designation
will be the first to be approved by the FDA for the designated indication,
thereby obtaining orphan drug status (i.e., marketing exclusivity). Orphan drug
designation does not prevent other manufacturers from attempting to develop the
same drug for the designated indication or from obtaining the approval of an NDA
for their drug prior to the approval of the Company's NDA. If another sponsor's
NDA for the same drug and the same indication is approved first, that sponsor is
entitled to exclusive marketing rights if that sponsor has received orphan drug
designation for its drug. In that case, the FDA would refrain from approving an
application by the Company to market its competing product for seven years,
subject to certain limitations. There can be no assurance that competing
products will not receive orphan drug designations and FDA marketing approval
before the Company's products.
NDA approval of a drug with an orphan drug designation does not prevent the FDA
from approving the same drug for a different indication, or a molecular
variation of the same drug for the same indication. Because doctors are not
restricted by the FDA from prescribing an approved drug for uses not approved by
the FDA, it is also possible that another company's drug could be prescribed for
indications for which the Company's product has received orphan drug designation
and NDA approval. Such prescribing of approved drugs for unapproved uses
(commonly referred to as "off label" use) could adversely affect the marketing
potential of products that have received orphan drug designation and NDA
approval. In addition, NDA approval of a drug with an orphan drug designation
does not provide any marketing exclusivity in foreign markets.
<PAGE>
The possible amendment of the Orphan Drug Act by the United States Congress has
been the subject of frequent discussion. Although no significant changes to the
Orphan Drug Act have been made for a number of years, members of Congress have
from time to time proposed legislation that would limit the application of the
Orphan Drug Act. There can be no assurance as to the precise scope of protection
that may be afforded by orphan drug designation and marketing approval in the
future or that the current level of exclusivity will remain in effect.
RELIANCE ON PATENTS AND OTHER PROPRIETARY RIGHTS.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. The
Company's success will depend, in part, on its ability to enjoy, obtain and
enforce protection for its products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of its trade
secrets and operate without infringing the proprietary rights of third parties.
The patent position of pharmaceutical firms is often highly uncertain and
generally involves complex legal and factual questions. At December 31, 1997,
Busulfex is the only product that the Company has under development for which
the use of or treatment methods licensed by the Company are covered by United
States patents. The Company evaluates the desirability of seeking patent or
other forms of protection for its products in foreign markets based on the
expected costs and relative benefits of attaining such protection. There can be
no assurance that any patents will be issued from any applications or that any
issued patents will afford adequate protection to the Company. Further, there
can be no assurance that any issued patents will not be challenged, invalidated,
infringed or circumvented or that any rights granted thereunder will provide
competitive advantages to the Company. Parties not affiliated with the Company
have obtained or may obtain United States or foreign patents or possess or may
possess proprietary rights relating to the Company's products. There can be no
assurance that patents now in existence or hereafter issued to others will not
adversely affect the development or commercialization of the Company's products
or that the Company's planned activities will not infringe patents owned by
others.
The Company could incur substantial costs in defending itself in infringement
suits brought against it or any of its licensors or in asserting any
infringement claims that the Company may have against others. The Company could
also incur substantial costs in connection with any suits relating to matters
for which the Company has agreed to indemnify its licensors or distributors. An
adverse outcome in any such litigation could have a material adverse effect on
the Company's business and prospects. In addition, the Company could be required
to obtain licenses under patents or other proprietary rights of third parties.
No assurance can be given that any such licenses would be made available on
terms acceptable to the Company, or at all. If the Company is required to, and
does not obtain any such required licenses, it could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more of its
products.
Busulfex, Xyrem, and Sucraid are in the development stage. Even if the
development of such products is successful and marketing clearance from the FDA
is obtained, there can be no assurance that applicable patent coverage, if any,
will not have expired or will not expire shortly after such approval. Any such
expiration could have a material adverse effect on the sales and profitability
of such product. Further, some of the compounds the Company has developed or
intends to develop (Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem
and Sucraid) are believed to be in the public domain or not presently subject to
patent protection in the United States.
The Company also seeks to protect its proprietary information and technology in
part by confidentiality agreements and inventors' rights agreements with its
employees. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise be disclosed to or discovered by its
competitors.
COMPETITION; RAPID TECHNOLOGICAL CHANGE.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources, marketing experience, research and development staffs and facilities
than the Company. Although the Company seeks to limit potential sources of
competition by developing products that are eligible for orphan drug designation
and NDA approval or other forms of protection, there can be no assurance that
the Company's competitors will not succeed in developing similar technologies
and products more rapidly than the Company or
<PAGE>
that these competing technologies and products will not be more effective than
any of those that are being or will be developed by the Company.
The Company is aware of products being developed by potential competitors that
have received orphan drug designations for the same respective indications as
Busulfex and Xyrem. If these drugs are approved for marketing before the
Company's products, the Company would be required to obtain a license from these
entities before its own competing products could be marketed. There can be no
assurance that any required license would be available on commercially
acceptable terms, or at all.
The pharmaceutical industry has experienced rapid and significant technological
change. The Company expects that pharmaceutical technology will continue to
develop rapidly, and the Company's future success will depend, in large part, on
its ability to develop and maintain a competitive position. Technological
development by others may result in the Company's products becoming obsolete
before they are marketed or before the Company recovers a significant portion of
the development and commercialization expenses incurred with respect to such
products. In addition, alternative therapies or new medical treatments could
alter existing treatment regimes, and thereby reduce the need for one or more of
the Company's products, which would adversely affect the Company's business and
its prospects.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY.
Only three of the Company's products have been approved for marketing by
regulatory authorities in the United States or elsewhere. Even if the balance of
the Company's products are approved for sale, there can be no assurance that
they will be commercially successful or that they will obtain the results
expected. The Company may encounter unanticipated problems relating to the
development, manufacturing, distribution and marketing of its products, some of
which may be beyond the Company's financial and technical capacity to solve. The
failure to adequately address any such problems could have a material adverse
effect on the Company's business and its prospects.
No drug development portfolio can be completely insulated from potential
failures, and it is likely that some products selected for development by the
Company will not produce the results expected during clinical studies, not
receive FDA approval or fail to generate product sales of an acceptable level.
The Company has terminated the development of eleven products from its portfolio
since inception: L-Cycloserine in 1994, Glucaric Acid in 1996, and nine products
in 1997. With respect to the nine products terminated in 1997, the Company took
this action in order to focus its development efforts on those products that fit
within three selected STMS: Antidote, Oncology Support, and Sleep Disorders. The
Company recorded a one-time charge of $780,000 in the third quarter of 1997 for
the estimated cost of winding down the development plans for nine development
products. In addition, the Company believes that several of the products
terminated in 1997 may have value to another pharmaceutical company and it will
seek to license or sell its rights relating to these products. The termination
of the development of any one or more of the Company's current products could
have a material adverse effect on the Company and its prospects.
Most orphan drugs have a potential United States market of less than $10 million
annually and many address annual markets of less than $1 million. There can be
no assurance that the Company's sales of its products will be profitable even if
accepted and used by patients and medical specialists.
DEPENDENCE UPON OTHERS FOR CLINICAL TESTING AND MANUFACTURING.
The Company does not have and does not intend to establish any internal product
testing, manufacturing or distribution capabilities. Accordingly, the Company
will be required to enter into arrangements with other companies for the
clinical testing, manufacture and distribution of its products. The inability of
the Company to retain third-parties for these purposes on acceptable terms could
adversely affect the Company's ability to develop and market its products. Any
failures by third-parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair the Company's ability
to deliver its products on a timely basis or otherwise impair the Company's
competitive position. In addition, the Company's dependence on third-parties for
the development, manufacture and distribution of its products may adversely
affect its potential profit margins and its ability to develop and deliver its
products on a timely basis.
<PAGE>
The manufacture of drugs can be an expensive, time consuming and complex process
and may require the use of materials with limited availability or a dependence
on sole suppliers. In addition, several of the Company's products have not yet
been manufactured in commercial quantities, and there can be no assurance that
such products can be so manufactured in a cost-effective manner. Manufacturers
of the Company's products will be subject to applicable good manufacturing
practices ("GMP") prescribed by the FDA or other rules and regulations
prescribed by foreign regulatory authorities. There can be no assurance that the
Company will be able to enter into or maintain relationships either domestically
or abroad with manufacturers whose facilities and procedures comply or will
continue to comply with GMP or applicable foreign requirements. Should
manufacturing agreements be entered into, the Company will be dependent on such
manufacturers for continued compliance with GMP and applicable foreign
standards. Failure by a manufacturer of the Company's products to comply with
GMP or applicable foreign requirements could result in significant time delays
or the inability of the Company to commercialize or continue to market a product
and could have a material adverse effect on the Company and its prospects. In
the United States, failure to comply with GMP or other applicable legal
requirements can lead to federal seizure of violative products, injunctive
actions brought by the federal government, and potential criminal and civil
liability on the part of a company and its officers and employees.
DEPENDENCE UPON OTHERS FOR DISTRIBUTION.
The Company has an exclusive agreement with Cardinal Health, Inc. ("Cardinal"),
whereby Cardinal, through its Specialty Companies, will provide a variety of
services to support the effective distribution of Orphan Medical's products.
Cardinal will provide integrated distribution and operations services to process
and support transactions between Orphan Medical and wholesalers, specialty
distributors, and direct customers; reimbursement management; patient assistance
and information hotline services; and specialty distribution and marketing
services to physician practices. Elliotts B Solution and Antizol are currently
distributed by Cardinal; which also will distribute the Company's proposed
products should those products receive marketing clearance from the FDA in the
future. The Company will, therefore, be substantially dependent upon Cardinal's
ability to successfully distribute Elliotts B Solution and Antizol and all of
the Company's proposed products that receive marketing clearance from the FDA.
Cystadane is currently distributed in the U.S. by Chronimed Inc. ("Chronimed"),
which distributes this product directly to patients through its mail order
pharmacy. The Company is substantially dependent upon Chronimed's ability to
successfully distribute Cystadane directly to patients in the U.S.
Antizol-Vet is currently distributed exclusively through W.A. Butler Company
("Butler"), the largest distributor of veterinary pharmaceuticals in the United
States. The Company is substantially dependent upon Butler's ability to
successfully distribute Antizol-Vet. The management of this product and reliance
on the sales efforts of a contract distributor has proven to be more difficult
than the Company originally expected and the Company is presently reviewing its
options with respect to the Antizol-Vet product, which could include the sale or
licensing of its rights to this product.
There can be no assurance that other distribution companies would be available
or continue to be available on commercially acceptable terms, if at all. The
loss of a distributor or failure to renew agreements with an existing
distributor could have a material adverse effect on the Company and its
prospects.
UNCERTAIN EXTENT OF PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
The Company's ability to commercialize its products successfully will depend in
part on the price it may be able to charge for its products and on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. Government officials and private health
insurers are increasingly challenging the price of medical products and
services. Significant uncertainty exists as to the pricing flexibility suppliers
will have with respect to, and the reimbursement status of, newly approved
health care products.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement government control of pricing
and profitability of prescription pharmaceuticals. Cost controls, if mandated by
a government agency, could decrease the price the Company receives for its
products or products it may develop in the future and, by preventing the
recovery of development costs, which could be substantial, and an
<PAGE>
appropriate profit margin, could have a material adverse effect on the Company.
Furthermore, federal and state regulations govern or influence the reimbursement
to health care providers in connection with medical treatment of certain
patients. If any actions are taken by federal and/or state governments, such
actions could adversely affect the prospects for sales of the Company's
products. There can be no assurance that actions taken by federal and/or state
governments, if any, with regard to health care reform will not have a material
adverse effect on the Company and its prospects.
Certain third-party payors may attempt to further control costs by selecting
exclusive providers of their pharmaceutical products. If such arrangements were
made with competitors of the Company, such payors would not reimburse patients
for purchases of the Company's competing products. This lack of reimbursement
would diminish the market for the Company's products and could have a material
adverse effect on the Company and its prospects.
RISK OF PRODUCT RECALL
Product recalls may be issued at the discretion of the Company, the FDA, the
U.S. Federal Trade Commission, or other government agencies having regulatory
authority for product sales, and may occur due to disputed labeling claims,
manufacturing issues, quality defects, or other reasons. No assurance can be
given that product recalls will not occur. The Company does not carry any
insurance to cover the risk of a potential product recall. Any product recall
could have a material adverse effect on the Company and its prospects.
PRODUCT LIABILITY AND INSURANCE RISKS.
The testing and sale of human health care products by the Company entails an
inherent risk that product liability claims may be asserted against the Company.
As the Company expands the scope of its clinical testing, the Company will be
exposed to increasing potential liabilities. The pharmaceutical industry has
experienced increasing difficulty in maintaining product liability insurance
coverage at reasonable levels, and substantial increases in insurance premium
costs in many cases have rendered coverage economically impractical. The Company
currently carries product liability coverage in the aggregate amount of $10
million for all claims made in any policy year. Although to date the Company has
not been the subject of any product liability or other claims, there can be no
assurance that the Company will be able to maintain product liability insurance
on acceptable terms or that its insurance will provide adequate coverage against
potential claims. The successful assertion of any uninsured product liability or
other claim against the Company could have a material adverse effect on the
Company's business and prospects.
DEPENDENCE ON CERTAIN OFFICERS AND KEY MANAGEMENT PERSONNEL.
The Company's success will be largely dependent upon the efforts of its
executive officers and key management personnel. The loss of the services of an
executive officer or one or more key employees, or the inability of the Company
to attract and retain skilled management and marketing personnel in the future,
could have a material adverse effect on the Company and its prospects.
RELATIONSHIP WITH CHRONIMED.
Although the Company believes the agreements that it had with Chronimed since
its July 1, 1994 spin-off were commercially reasonable, such agreements were not
the product of arms-length negotiations. In June 1997, the Company terminated
these agreements (the "Termination Agreement"), except for the Cystadane
Agreement. The Termination Agreement provides that the Company pay Chronimed
compensation equal to $2,500,000, consisting of cash and shares of the Company's
Common Stock. The October 1996 Cystadane Agreement between the Company and
Chronimed applies solely to the domestic distribution of Cystadane. Several of
the Company's directors and executive officers are current or former employees,
shareholders and/or directors of Chronimed. The Termination Agreement and the
October 1996 Cystadane Agreement were approved by all of the independent outside
members of the Company's Board of Directors.
POSSIBLE VOLATILITY OF STOCK PRICE AND DILUTION OF STOCK - TERMINATION AGREEMENT
WITH CHRONIMED.
Pursuant to the terms of the Termination Agreement, the Company has a remaining
obligation to compensate Chronimed with cash and Common Stock having a total
value of $2,250,000. Cash payments against this remaining obligation will be
based on a 3 percent temporary royalty on the Company's product sales, payable
quarterly,
<PAGE>
beginning September 30, 1997. Unregistered shares of Common Stock equal to 1
percent of the Company's outstanding shares at each quarter end, beginning March
31, 1998, will be issued quarterly to Chronimed until the sum of all temporary
royalty payments and the market value (as defined below) of all issued Common
Stock equals $2,250,000, at which time the Company's obligation to make
temporary royalty payments will cease. The Company is obligated file a
registration statement with the Securities and Exchange Commission to register
such shares. The market value of shares issued to Chronimed as payment against
the remaining obligation of $2,250,000 will be determined as follows: (i) the
market value of any such shares sold within 90 days after the effective date of
a registration statement covering such shares will be equal to the net proceeds
realized by Chronimed from the sale of such shares, or (ii) the market value of
any such shares not sold within 90 days after the effective date of a
registration statement covering such shares will be equal to the average last
bid price for shares of the Company's Common Stock as reported on Nasdaq for the
last five days within the 90 day period. The Company anticipates Chronimed will
sell in the open market the shares it receives from the Company within the 90
day period. The Company has the option, regardless of the market price of its
Common Stock, to buy-out for cash the remaining obligation to Chronimed.
There is risk that the Company's current shareholders' ownership could be
substantially diluted and/or the market value of their shares adversely affected
in the event any one or a combination of the following events occur: (1) sales
by Chronimed of the Company's Common Stock cause the price of the Company's
Common Stock to decrease; (2) in the event of a decline in the value of the
Company's Common Stock, the Company would be required to issue more shares in
subsequent periods to satisfy its remaining obligation to Chronimed; or (3) the
Company's sales of future products are significantly less than forecast, which
would decrease the temporary royalty payments that would be applied against the
remaining obligation and, thereby, increase the number of shares required to be
issued to Chronimed. The realization of any one or combination of these risks,
or the decision by the Company to exercise its option to effect a cash buy-out
of the remaining obligation, could have a material adverse effect on the
Company's business, its prospects and its shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - LOSS OF NASDAQ NATIONAL MARKET LISTING.
There is risk that the market value and the liquidity of the public float for
the Company's Common Stock could be adversely affected in the event the Company
no longer meets the Nasdaq's requirements for continued listing on the National
Market tier. For continued listing on the Nasdaq National Market, a company must
satisfy a number of requirements, which in the Company's case includes either:
(1) net tangible assets in excess of $4.0 million or (2) a market capitalization
of at least $50.0 million. At December 31, 1997, the Company's net tangible
assets equaled approximately $3,645,000 and its market capitalization was
approximately $30.0 million. Net tangible assets means total assets less total
liabilities and market capitalization means total outstanding shares multiplied
by the last sales price quoted by Nasdaq. Accordingly, upon receiving notice
from Nasdaq regarding this deficiency, the Company must either raise additional
capital in order to satisfy the $4.0 million net tangible asset requirement or
have a market capitalization of at least $50.0 million. Should the Company fail
to satisfy either requirement, among others, the Company's would no longer
qualify for listing on the Nasdaq National Market, but would qualify for
quotation on the Nasdaq Small Cap Market provided it had net tangible assets in
excess of $2.0 million. The Company's ability to raise additional capital and
the market value of the Company's Common Stock could be adversely affected by
failing to meet Nasdaq's requirements for listing on either the National Market
or the Small Cap Market. The realization of any one or combination of these
risks could have a material adverse effect on the Company's business, its
prospects and its shareholders.
POSSIBLE VOLATILITY OF STOCK PRICE - GENERAL.
There is generally significant volatility in the market prices of securities of
early stage pharmaceutical companies. Contributing to this volatility are
various factors and events, such as the announcements by the Company or its
competitors of new product developments, clinical testing results, governmental
approvals, regulations or actions, developments or disputes relating to patents
or proprietary rights, public concern over the safety of therapies and
fluctuations in financial performance from period to period. These and other
factors and events may have a significant impact on the Company's business and
on the market price of the Common Stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying balance sheets of ORPHAN MEDICAL, INC. as of December 31, 1997, and
the related statements of operations for the year ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,150,877
<SECURITIES> 5,018,353
<RECEIVABLES> 404,537
<ALLOWANCES> 22,600
<INVENTORY> 308,548
<CURRENT-ASSETS> 7,901,314
<PP&E> 494,680
<DEPRECIATION> 157,044
<TOTAL-ASSETS> 8,238,950
<CURRENT-LIABILITIES> 3,421,600
<BONDS> 0
0
0
<COMMON> 60,996
<OTHER-SE> 3,584,906
<TOTAL-LIABILITY-AND-EQUITY> 8,238,950
<SALES> 634,838
<TOTAL-REVENUES> 634,838
<CGS> 297,727
<TOTAL-COSTS> 297,727
<OTHER-EXPENSES> 12,274,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (549,356)
<INCOME-PRETAX> (11,387,869)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,387,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,387,869)
<EPS-PRIMARY> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
